TO: Board of Directors TreeHouse

FROM: Financial Analyst

DATE: 26th April 2017

SUBJECT: Project Analysis & Recommendation

Based on the estimated costs, revenues, and expenses over the 20-year project life, we estimated the incremental cash flows associated with the project; see enclosure #2. For WACC, refer to enclosure #1. The WACC is estimated at 8.3% using the 50-50 target debt/equity weights.

Applying the WACC to the estimated cash flows, we obtained a positive NPV value which is 1.900 million. The IRR is greater than the WACC, which is 11.5%. The modified IRR is 9.7%, also greater than the WACC.

Based on the positive NPV and the greater than WACC IRR and MIRR, we would recommend the project. It will add value to the firm.

 

Enclosure:

  1. Calculation of WACC

 

Component cost (before-tax) Component cost (after-tax) Weight Cost*Weight
Debt 4.00%* 2.4% 50% 1.2%
Equity 14.24%** 14.24% 50% 7.1%
WACC= 8.3%

 

* N=20, PMT=50, PV=-1136, FV=1000. YTM=4.00%.

** rs=D0(1+g)/P0+g=1.5*1.02/12.5+2%=14.24%

 

  1. Project cash flows (all in $million)

 

(year 0-10)

0 1 2 3 4 5 6 7 8 9 10
Revenues 1.500 3.500 3.500 3.500 3.500 3.500 3.500 3.500 3.500 3.500
Operating expenses 1.050 2.100 2.100 2.100 2.100 2.100 2.100 2.100 2.100 2.100
Depreciation 0.083 0.165 0.165 0.165 0.165 0.165 0.165 0.165 0.165 0.165
OCF 0.303 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.906
Investment -6.450 -0.700
NWC/recovery -0.045
Salvage value
Incremental cash flow -6.495 0.303 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.206

 

(year 11-20)

11 12 13 14 15 16 17 18 19 20
Revenues 2.625 3.500 3.500 3.500 3.500 3.500 3.500 3.500 3.500 3.500
Operating expenses 1.575 2.100 2.100 2.100 2.100 2.100 2.100 2.100 2.100 2.100
Depreciation 0.165 0.165 0.165 0.165 0.165 0.165 0.165 0.165 0.165 0.165
OCF 0.696 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.906
Investment
NWC/recovery 0.045
Salvage value 3.240*
Incremental cash flow 0.696 0.906 0.906 0.906 0.906 0.906 0.906 0.906 0.906 4.191

 

* Net salvage value

Cost 6.450
Acc Depr. 3.225
Book value 3.225
Cash 3.250
Gain 0.025
Taxes 0.010
Net proceeds 3.240

Treehouse case Excel Sheet