Project Financial Analysis and Cash Flow Estimation

To
Tucker Hansson
From: XXX
Date: XX February, 2008
Subject: Project financial analysis, cash flow estimation, computation of
net present value and sensitivity analysis
1. Free Cash flows of the project:
The project is expected to last for 10 years and using the assumptions given for coming 10 years,
project’s free cash flows for the next 10 years is as under:
Year Cash flow
0 (45,000)
1 (7,338)
2 6,785
3 7,608
4 8,683
5 9,590
6 10,764
7 11,056
8 11,350
9 11,647
10 24,764
2. Weighted average cost of capital:
WACC, i.e. Weighted average cost of capital, is the cost of capital that the company incurred for the
funds being deployed by the company in business. WACC, as the name suggests, is the weighted
average of the cost of capital for various sources of fund, i.e. debt, equity, preference share capital,
etc.
As per the given assumptions, new estimated debt equity ratio of the company is 20.9%, i.e. total
capital of the company would include 20.9% of debt and 79.1% of equity.
Thus, in order to compute the weighted average cost of capital, we require the cost of equity and
cost of debt, using these numbers, the weighted average cost of capital is 12.08%. (Refer exhibit 2)