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Financial Modelling Exercise

 Ted is contemplating starting up Dozer Limited, a bulldozer leasing business that will lease
bulldozers to mining and construction operations.
 In order to start his business, Ted intends to purchase a brand new bulldozer worth $100,000
from Cat & Pillar Corp.
 He believes that the business will operate under the following assumptions:

1. In the first year, the business will experience the following revenues and expenses:

Revenues (lease income) $60,000 pa
Fuel Costs (% of sales) 12%
Fixed Expenses:
Wages $15,000 pa
Repairs & Maintenance $6,000 pa
Other Expenses $6,000 pa

2. Sales are expected to increase by 10% per year
3. Trading terms with suppliers and customers are assumed to be:

Debtor Days 30
Creditor Days 45

4. Fuel costs are to be paid by Dozer Limited and are factored into the lease payments.
5. Inflation is expected to be 10% per year
6. Depreciation is straight line at 20%
7. The company will be financed 50% by debt and 50% by equity
8. Annual principal repayments will be $10,000 to be paid at year end. The loan carries an
interest rate of 10% per annum.
9. The bulldozer is expected to be sold for $50,000 at the end of 5 years. Assume no other
bulldozers will be purchased.
10. The investor’s tax rate is 30%.
11. The following data is also available based on Ted’s initial research into the industry:

Risk Free Rate (Rf) 6%
Market Return (Rm) 16%
Beta 1.5


1. Prepare a 5 year forecast for the business. The 5 year forecast should include a pro-forma
balance sheet, income statement and statement of cash flows.

2. Calculate the cost of equity for Dozer Limited using the CAPM model.

3. Calculate the after tax Weighted Average Cost of Capital (“WACC”) for Dozer Limited using the
assumptions provided above and the cost of equity calculated using CAPM.

4. Calculate the Free Cash Flow for the project each year.

5. Calculate the Net Present Value (“NPV”) for the project.

6. What is the Internal Rate of Return (“IRR”) of the project? Should the project be undertaken
assuming Ted requires a rate of return of at least 12% for his investments?