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 6.45 Acc Depr. 3.225 Book value 3.225 Cash 3.25 Gain 0.025 Taxes 0.01 Net proceeds 3.24

Treehouse case Excel Sheet