CH11_mini_word_ans

Fundamentals of Corporate Finance + Standard & Poor's Educational Version of Market Insight

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ECSY-COLA IN INGLISTAN Principles of Corporate Finance 7 th Edition Richard A. Brealey and Stewart C. Myers Libby Flannery prepared the attached spreadsheet to analyze the NPV of Ecsy- Cola’s proposed investment in Inglistan. With the inputs suggested in the mini-case, NPV is very slightly negative on a $20 million outlay. Libby was conscious of the spreadsheet’s simplifying assumptions. First, there was no provision for working capital. Second, the project cash flows were projected as a perpetuity. The project, if successful, would generate cash returns for a long time, but not forever. On the other hand, the 25 per cent nominal discount rate handed down from Ecsy-Cola’s headquarters seemed unreasonably high – was there a fudge factor built in? 1 At least the discount rate should be converted to real terms, since the revenue and cost projections did not incorporate inflation. At a 22 per cent discount rate (assuming an inflation rate of roughly 3 per cent 2 ), NPV increased to about $3 million. [Calculate this
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CH11_mini_word_ans - ECSY-COLA IN INGLISTAN Principles of...

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