Calculation of Initial Outlay, Operating Cash Flow, Terminal Cash Flow, and NPV

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Finance

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Table of Contents
Task 1(a)..........................................................................................................................................3
Calculation of initial outlay.........................................................................................................3
Calculation of operating cash flow..............................................................................................3
Calculation of terminal cash flow................................................................................................4
Calculation of NPV......................................................................................................................4
Task 1(b)..........................................................................................................................................5
Sensitivity analysis......................................................................................................................5
Scenario analysis.......................................................................................................................10
References......................................................................................................................................11

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Task 1(a)
Calculation of initial outlay
An initial outlay is a sum which is invested by the company at the beginning of any project. This
is the amount which is spent for the installation of the project and in that capital expenditures and
the working capital investments are taken into account (Huang, Xiang, and Islam, 2014). By
considering all of these there is the calculation of initial outlay of the project. The calculation of
the same is made for the given expansion.
Particulars Amount
(in
$million)
Building cost 24
Equipment cost 16
Net working capital 12
Initial investment
outlay
52
The company will be investing an amount of $52 million in the initial stage of the project.
Calculation of operating cash flow
In the business, there are various operations which are performed. In the undertaking of them
there are various cash inflow and outflows which takes place. It is required that they all shall be
taken into account by which the final amount of cash flow can be ascertained. For the calculation
of this all the expenses will be deducted from the revenues which are made (Dehghani and
Ataee-pour, 2012). The tax will also be taken into account so that the net amount of cash flow
made during the period can be determined. The cash flow that will be made by the business in
the duration of four years of project will be calculated as follows:
Particulars Year 1 Year 2 Year 3 Year 4
Sales 80 84 88.2 89.964
Variable manufacturing
cost
48 50.4 52.92 53.9784

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Gross profit 32 33.6 35.28 35.9856
Fixed expenses 10 10 10 10
Depreciation 3.8 3.8 3.8 3.8
Net income before tax 18.2 19.8 21.48 22.1856
Tax @ 30% 5.46 5.94 6.444 6.65568
Profit after tax 12.74 13.86 15.036 15.5299
Depreciation 3.8 3.8 3.8 3.8
Cash flow 16.54 17.66 18.836 19.3299
The amount of the cash flow which is made by the company has been calculated and it can be
noted that it is increasing with time. The cash flow is lowest in the first year and after that, it is
increasing because of the increased revenue.
Calculation of terminal cash flow
The terminal cash flow is the amount which is gained at the end of the project from the sale of
the assets and other aspects (Kiechle and Lampenius, 2012). There will be the recovery of the
working capital which has been invested and that will also be taken into account.
Particulars Amount
(in
$million)
After tax value of building -4.62
After tax value of
equipment
0.56
Working capital recovery 12
Terminal value 7.94
The project will be having the terminal cash flow of $7.94 million at the end of four years when
the project will be completed.
Calculation of NPV
The undertaking of any investment is required to be evaluated in order to make the best decision.
In that, all the inflows and outflows will have to be taken into account (Shefrin, 2014). In the
given case net present value approach is being used for the evaluation of the expansion project.
The calculation for the same will be made and then decision will be made on basis of the