Bond

Face Value 100

Tenor 5 years
Coupon 10%

Expected rate 10%

Cash Flows
Year 1 2 3 4 5

Interest 10 10 10 10 10
Principal 100

NPV of Cash Flow 100.00 10 10 10 10 110

 In this simplified illustration, we consider a business with a given profitability - the business is assumed to
a limited life (3 years) after which it is liquidated. We also assume no taxes.

The two scenarios have identical revenue and profits - however scenario 2 has less working capital
reinvestment neeeds - hence creates better outcome in terms of NPV of cash flows.

Scenario 1 Scenario 2

Y1 Y2 Y3

Revenue 20 30 40 Revenue

Profit 25% 5 7.5 10 Profit 25%

NWC 20% 4 6 8 NWC 10%

Increase in NWC 4 2 2 Increase in NWC

Cash available 1 5.5 8 Cash available

8

Cash Flows 1 5.5 16 Cash Flows

NPV= $17.48 <--- Please calculate

 ity - the business is assumed to have
es.

2 has less working capital

cash flows.

Y1 Y2 Y3

20 30 40

5 7.5 10

2 3 4

2 1 1

3 6.5 9
4

3 6.5 13

$17.87 <--- Please calculate

 Y1 Y2 Y3 Y4

Revenue 100.0 110.0 121.0 133.1 Revenue

Profit 10% 10.0 11.0 12.1 13.3 Profit

Reinvestment 20% (2.0) (2.2) (2.4) (2.7) Reinvestment

Cash Flow 8.0 8.8 9.7 10.6 Cash Flow

Growth A 10.0% 10.0% 10.0% Growth

RoIC# B 50.0% 50.0% 50.0% RoIC#

Reinvestment rate C 20.0% 20.0% 20.0% Reinvestment rate

RoIC * Reinv rate 10.0% 10.0% 10.0% RoIC * Reinv rate

A=B*C

# 'incremental' RoIC has been used for illustration # 'incremental' RoIC has been used fo

Cash Flow = Earnings * (1- Reinvestment Rate) 9.7 10.6

Cash Flow = Earnings * (1 - Growth / RoIC) 9.7 10.6

 Y1 Y2 Y3 Y4

100.0 110.0 121.0 133.1

10% 10.0 11.0 12.1 13.3

40% (4.0) (4.4) (4.8) (5.3)

6.0 6.6 7.3 8.0

A 10.0% 10.0% 10.0%

B 25.0% 25.0% 25.0%

C 40.0% 40.0% 40.0%

10.0% 10.0% 10.0%

A=B*C

tal' RoIC has been used for illustration