Financial Management Report: NPV, WACC, and Free Cash Flow Analysis

This report provides an analysis of a project's financial viability using Net Present Value (NPV), Weighted Average Cost of Capital (WACC), and Free Cash Flow (FCF) calculations. The report begins by defining NPV and explaining its role in investment decisions, highlighting the acceptance criteria based on positive, negative, and zero NPV values. The WACC is calculated, incorporating the cost of equity and cost of debt to determine the overall cost of capital. Furthermore, the report includes the calculation of free cash flow over three years, considering operating income, expenses, amortization, assets, and working capital requirements. Finally, the NPV of the project is calculated, demonstrating a positive NPV, thereby supporting the project's acceptance. The report also includes references to academic sources that support the analysis.

Running head: REPORT 0
financial management
APRIL 25, 2019
STUDENT DETAILS:

REPORT 1
Analysis of project-
Net present value refers to the difference between the PV of cash outflow and the PV of cash
inflow, which take place as an outcome of undertaking the project related to investment. The
net present value evaluation is very proper manner to aggregate the cash flow related with
decisions of business, which are spread on various time period, however certain evaluation
can be needed to assemble each applicable and appropriate cash flow (Ondraczek,
Komendantova and Patt, 2015). The net present value may be zero, negative or positive. The
decision related to acceptance of project is based on these three possibilities. Following are
the possibilities of net present value (NPV)-
1. Positive NPV- In a case where the present value of cash inflow is more than the
present value of cash outflow, then NPV is considered as positive NPV. In this
possibility, one can make the decision to accept the proposal of investment.
2. Negative NPV- In a case where the present value of cash inflows is not more than the
present value of cash outflows, then the net present value is considered as negative net
present value. In this way, the project having negative NPV is not acceptable. One
can reject the project with negative net present value.
3. Zero NPV- In a case where the present value of cash inflows is same as the present
value of cash outflows, in that situation the net present value is considered as zero net
present value. In this possibility, one may also make the decision to accept a proposal
of investment (Marchioni and Magni, 2018).
Calculation of WACC-

REPORT 2
Rate Weight WACC
Cost of equity (Ke) 7.50% 0.7 5.25%
cost of debt (Kd) 2.40% 0.3 0.72%
WACC 5.97%
Calculation of free cash flow-
Years 0 1 2 3
Operating income 250 300 400
Operating expense -180 -200 -40
operating cash flow 70 100 360
Amortization 80 90 40.5
Investment in
assets -70 -50 -45
WCR -120 -150 -190
Net free cash flows -40 -10 165.5
Calculation of NPV-
0 -70 1 -70
1 -40
0.94366
3 -37.7465
2 -10 0.8905 -8.905

REPORT 3
3 165.5
0.84033
3 139.075
4 0.25
0.79299
1
0.19824
8
NPV
22.6217
5
This project has positive NPV. Therefore, it can be acceptable.

REPORT 4
References
Marchioni, A. and Magni, C.A. (2018) Investment decisions and sensitivity analysis: NPV-
consistency of rates of return. European Journal of Operational Research, 268(1), pp.361-
372.
Ondraczek, J., Komendantova, N. and Patt, A. (2015) WACC the dog: The effect of
financing costs on the levelized cost of solar PV power. Renewable Energy, 75, pp.888-898.