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NATASHA CASE STUDY

SALARY $38000 Increases at a rate of 3% per year. Has $75000.

Option 1: Certificate Course

Cost of the course $5000 and Time duration: 1 Year


Salary increases with $10000 from the next year.

Option 2: MBA
Course fee $25000 per year and duration is 3 years.

Salary increases with $20000.

Growing Annuity : A growing annuity, is a stream of cash flows for a fixed period of time, t, where the initial cash flow, C, is growing (or declining, i.e., a negative growth rate) at a constant rate g.

If Natasha Continues the present job:

Her Salary would remain 38000 and increases @3% per year for 35 years Then the Present Value of her earnings:

Here we use Growing Annuity:


PV =

g = 0.03 , r = 0.0498

PV = $933613.0676

Choosing Certificate Course:


Will increase her Salary by $10000 from second year.
Hence in second year her salary will be

(38000*1.03)+10000 = $49140.
natasha.xlsx NPV = $1162896.587 + $70000 = $1232896.587.

Choose MBA :
Increase her salary by $20000 from 4th year.
natasha.xlsx

MBA Fee : 25000 + 25000/(1.0498) + 25000/(1.0498)^2.


Total fee 75000 71498.43 = $3501.5 NPV = $1331967.588 + $3502= $1335469.588.

New type of portable computers system was proposed.

Initial Investment of 10% of net PPE for fiscal year ended


as on 2006.

Additional Investments such as 10 % of initial investment for 1st year 5 % of 1st year investment for 2nd year 1% of 2nd year investment for next 3 years (3rd , 4th & 5th Years)

Free cash flows = (unlevered Net Income)+ Depreciation Cap Ex Change in NWC Unlevered Net income = (Revenues Cost Depreciation) *(1-marginal tax rate) Net Working Capital = Current assets Current Liabilities. = Cash + Inventory + Receivables - Payables Change in NWC = NWC of this year NWC of previous year.

Marginal Tax Rate : Firms Marginal corporate is a tax rate it will pay on an incremental dollar of Pre Tax income.

Gross Fixed Assets

(Plant, Property & Equip) =

3557.00

Operating Profit before Depreciation

(EBITDA)

4,776.00

Plant, Property and Equipment for the fiscal year ended 2006 is $3557mn

Initial investments(10%) of PPE for

new product = $355.7mn

ADDITIONAL INVESTMENTS (10% of initial investments) for 1st year=$35.57mn

Additional investments for second year

(increase of 5%) =$37.35mn

Additional investments for the next three years= $37.722mn, $38.1mn, $38.48mn respectively

Costs for the new product for the first year= $1365.09mn For the second year= $1569.85mn
For the third year= $1726.83mn For the fourth year= $1813.18mn For the fifth year= $1903.83mn

Depreciation= cost of assets/lifetime value; 355.7/10 Using straight line method over a ten year life depreciation= $35.57mn Tax rate: Income Tax/ EBIT

EBIT=4608.00 Income tax=1006 For the year end 2005 the tax rate is 21.83%

YEAR 2006
EBIT 4608

2007
3345 762 22.7 %

2008
3827 880 22.9 %

2009
3324 846 25.4 %

2010
_ _ _

Incom 1006 e Tax Tax Rate 21.8 %

Unlevered Net Income= (RevenuesCosts -Depreciation) X (1-Tc) = EBIT x 1-Tc 2006 2007 2008 2009

YEAR

ULNI

3626.13 4

2620.47

2985.31 2

2549.08 2

Considering a constant percentage of 15% of the project sales, NWC and increase in NWC would be
2006 2007 2008 2009 2010

Year

NWC

$716.4mn

$531.15m n $(185.25) mn

$619.5mn

$594.15m n $(25.35)m n

Change in NWC

$716.4mn

$88.35mn

$(594.15) mn

Free Cash Flow= Unlevered Net Income+ Depreciation- Capital expenditure- change in NWC

Year Gross Profit ULNI Plus Depreciat ion Less capital exp Less Change in NWC Free Cash Flow

2006 3626.134 35.57

2007 308.55 2620.47 35.57

2008 354.83 2985.312 35.57

2009 390.31 2549.08 35.57

2010 409.83 2549.08 35.57

355.57

35.57

37.34

37.72

38.1

716.4

185.25

88.35

25.35

3306.264

1904.2

2798.32

2458.48

2521.33

1.

Adjusted closing stock prices


1.
2.

For September 28, 2004 - $2.65 For October 7, 2004 - $4

2.

Diluted weighted Average shares from the income statement dated 12/31/2004 are 3902400.

Change in value = (change in stock prices) x (number of shares outstanding) Change in value = (4 2.65) x 3902400 = $5268240 From NYU cost of capital website, cost of capital for the Entertainment Tech industry is 9.02%.

Expected NPV of the project = $5268240

For 5-year horizon


NPV = 5268240 Cost of Capital, r = 9.02% Number of years, n = 5 Formula for calculating constant annual cash flows, NPV = (P/r)*(1 1/(1 + r)^n) Substituting above values in the equation, we get P = $1355127.7

For 10-year horizon


NPV = 5268240 Cost of Capital, r = 9.02% Number of years, n = 10 Formula for calculating constant annual cash flows, NPV = (P/r)*(1 1/(1 + r)^n) Substituting above values in the equation, we get P = $821620.43

For 15-year horizon


NPV = 5268240 Cost of Capital, r = 9.02% Number of years, n = 15 Formula for calculating constant annual cash flows, NPV = (P/r)*(1 1/(1 + r)^n) Substituting above values in the equation, we get P = $654343.81

Percentage stock price reaction is given by, (change in stock price)/(original stock price)*100 %age change = (4 2.65)/2.65 * 100 = 50.94%

Discussed about leading Management journal Effective Working Capital Checking Effectiveness Of BP by calculating EWC

Cash Conversion Cycle = Inventory days+Account Recievable Days-Account payable Days. Inventory Days= Inventory/Avereage Daily cost of Goods sold. Account Recievable Days=AccountRecievable/Average Daily Sales.

Account Payable Days= Account Payable/Average Daily Cost of goods sold