Corporate Finance Analysis: WACC, NPV and Best/Worst Case Scenario

This report provides a detailed analysis of a project in corporate finance, including determination of weighted average cost of capital and NPV under different scenarios. The report also includes a recommendation and conclusion based on the analysis.

Running head: CORPORATE FINANCE
Corporate Finance
Name of the Student:
Name of the University:
Authors Note:

1CORPORATE FINANCE
Table of Contents
Introduction:...............................................................................................................................2
Determination of Weighted Average Cost of Capital................................................................2
Analysis of the Proposal.............................................................................................................3
Analysis under Best and worst case scenario.............................................................................4
Recommendation and Conclusion..............................................................................................6
Reference....................................................................................................................................7

2CORPORATE FINANCE
Introduction:
In this report an attempt is to evaluate the project by the financial analyst so that the
project could be evaluated. The report provides a detailed analysis of the project that includes
determination of weighted average cost of capital and determination of NPV under different
situation (Damodaran 2016). The main aim of this analysis is to provide a detailed
understanding so that the financial analyst could make important decision.
Determination of Weighted Average Cost of Capital
This section of the report provides detailed calculation of the weighted average cost of
capital. In order to calculate WACC the cost of equity and cost of debt is calculated. The cost
of equity is calculated using the Capital Asset Pricing Model.
Cost of Equity
Calculation of Cost of Equity using CAPM
Particulars Amount
Risk Free Rate 3.5%
Beta 1.13
Market Return 12.52%
Cost of Equity 14%
Cost of Debt
Calculation of Cost of Debt
Particulars Amount
Cost of Debt 10%
Tax Rate 34%
After Tax cost of debt 7%
Weighted Average Cost of capital
Calculation of Weighted average cost of capital
sources of fund Market Value Weighta cost of CXW

3CORPORATE FINANCE
ge capital
Equity $1,300,550,000.00 98% 14%
0.134070
27
Bond $27,702,000.00 2% 7%
0.001376
49
Total 1,328,252,000.00 100%
Weighted average cost of
capital 13.54%
Analysis of the Proposal
Statement showing calculation of NPV
Particulars Rate 1 2 3
sales unit 1250000 1250000 1250000
selling price $1.25 $1.25 $1.25
Total Sales
$1,562,500.0
0
$1,562,500.0
0
$1,562,500.0
0
less: variable cost 0.24 $300,000.00 $300,000.00 $300,000.00
contribution
$1,262,500.0
0
$1,262,500.0
0
$1,262,500.0
0
less: fixed cost $250,000.00 $250,000.00 $250,000.00
Less: depreciation
$1,000,000.0
0
$1,000,000.0
0
$1,000,000.0
0
Profit $12,500.00 $12,500.00 $12,500.00
Tax 34% $4,250.00 $4,250.00 $4,250.00
Profit After Tax $8,250.00 $8,250.00 $8,250.00
Add:
Depreciation
$1,000,000.0
0
$1,000,000.0
0
$1,000,000.0
0
Terminal Value $300,000.00
Operating Cash flow
$1,008,250.0
0
$1,008,250.0
0
$1,308,250.0
0
Discounting Factor 0.8807 0.7757 0.6831
Present Value of Cash
flow $887,976.46 $782,050.28 $893,697.22
Total Present Value
$
2,563,724
cost of investment
$
3,000,000
NPV
$ -
436,276

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Statement showing Calculation of Depreciation
Particulars Amount
Initial Investment $3,000,000.00
Number of year 3
Depreciation $1,000,000.00
In the current case, the Bega Cheese proposed to arrange product mix a range of
Yogurt products to capitalise on the growing demand for natural yogurt range as decided by
the board of director (Ehrhardt and Brigham 2016). The calculation above indicates NPV of
the project under normal scenario. The calculation indicates that under normal circumstances
the NPV of the project is negative $436276. Therefore under normal circumstances the
current project is generating negative return.
Analysis under Best and worst case scenario
Best Case scenario
Statement showing calculation of NPV (Best Case)
Particulars Rate 1 2 3
sales unit 2500000 2500000 2500000
selling price $1.24 $1.24 $1.24
Total Sales
$3,100,000.0
0
$3,100,000.0
0
$3,100,000.0
0
less: variable cost 0.22 $550,000.00 $550,000.00 $550,000.00
Contribution
$2,550,000.0
0
$2,550,000.0
0
$2,550,000.0
0
less: fixed cost $250,000.00 $250,000.00 $250,000.00
Less: depreciation
$1,000,000.0
0
$1,000,000.0
0
$1,000,000.0
0
Profit
$1,300,000.0
0
$1,300,000.0
0
$1,300,000.0
0
Tax 34% $442,000.00 $442,000.00 $442,000.00
Profit After Tax $858,000.00 $858,000.00 $858,000.00
Add:
Depreciation
$1,000,000.0
0
$1,000,000.0
0
$1,000,000.0
0
Terminal Value $300,000.00

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Operating Cash flow
$1,858,000.0
0
$1,858,000.0
0
$2,158,000.0
0
Discounting Factor 0.8807 0.7757 0.6831
Present Value of Cash
flow
$1,636,360.2
9
$1,441,159.8
4
$1,474,182.0
0
Total Present Value
$
4,551,702
cost of investment
$
3,000,000
NPV
$
1,551,702
The calculation above indicates that under best circumstances the project will provide
positive return of $1551702. That means under best circumstances the project is acceptable.
Worst Case Scenario
Statement showing calculation of NPV (Worst Case)
Particulars Rate 1 2 3
sales unit 950000 950000 950000
selling price $1.32 $1.32 $1.32
Total Sales
$1,254,000.0
0
$1,254,000.0
0
$1,254,000.0
0
less: variable cost 0.27 $256,500.00 $256,500.00 $256,500.00
Contribution $997,500.00 $997,500.00 $997,500.00
less: fixed cost $250,000.00 $250,000.00 $250,000.00
Less: depreciation
$1,000,000.0
0
$1,000,000.0
0
$1,000,000.0
0
Profit -$252,500.00 -$252,500.00 -$252,500.00
Tax 34% -$85,850.00 -$85,850.00 -$85,850.00
Profit After Tax -$166,650.00 -$166,650.00 -$166,650.00
Add:
Depreciation
$1,000,000.0
0
$1,000,000.0
0
$1,000,000.0
0
Terminal Value $300,000.00
Operating Cash flow $833,350.00 $833,350.00
$1,133,350.0
0
Discounting Factor 0.8807 0.7757 0.6831
Present Value of Cash
flow $733,940.17 $646,388.89 $774,218.80
Total Present Value
$
2,154,548

6CORPORATE FINANCE
cost of investment
$
3,000,000
NPV
$ -
845,452
The calculation above indicates that under worst case scenario the NPV of the project
is negative $845452.
Recommendation and Conclusion
In the given situation based on the analysis the financial analyst derived that the
project is not suitable under normal and worst case scenario. However, the project is expected
to give positive return only in the best scenario. Therefore, based on the analysis and
calculation shown above it can be said that the project should be implemented if the best case
scenario can be maintained.

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Reference
Damodaran, A., 2016. Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Fracassi, C., 2016. Corporate finance policies and social networks. Management
Science, 63(8), pp.2420-2438.
Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.