Corp Fin - Earl Case Question #3

CFA Level II
#1

Hi all,

I’m having a problem calculating the NPV on Question 3. Can someone help out?

I calculated the following after-tax operating cash flows:

CF0 = (185,000)

CF1 = 66,000

CF2= 69,600

CF3= 75,000

CF4 = 82,200

CF5 = 91,200

I= 10

My calculator is giving me an NPV of 101,641, which would result in an increased NPV of 26,177, which is not the correct answer. What am I doing wrong here? I assume I’m miscalculating the cash flows but can’t figure it out based on the answer provided. Many thanks if anyone can help.

#2

you forgot to add 35000 back to CF5 from the recovery of net working capital

#3

Ah… Thanks, much appreciated…

#4

Edbert,

In Corporate Finance England - Question #1, why is it that the after-tax operating cash flow in this example does not account for the additional net working capital cash outflow? Is it this only done for NPV purposes but not for answering questions regarding operating cash flows? I’m confused.

Thanks for your help.

#5

Nevermind, figured it out. Working capital and fixed capital cash flows would constitute non-operating cash flows.

#6

Hey Donkey,

Just a recommendation…I think it is alot less time consuming to solve this problem by looking at the Delta in depreciation instead of calculating each cash flow for each year.

For example, your CF1 would be (49,995 - 30,000)*(T) and your CF5 would be (0 - 30,000)*(T)

Might be a bit quicker :slight_smile:

#7

Yeah that’s a great tip. Just glad I can navigate the calculation both ways now. Much appreciated guys. I’m really playing catch-up here so definitely appreciate the help.