Business Net Present Values Residual Value & NPV Calculation Exercises

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Using your income statements and cash flows from the past two exercises, calculate two Net Present Values using the two approaches to determining a Residual Value. As an additional calculation, identify how much the residual value impacts your maximum purchase price or Net Present Value.

The following assumptions will apply:

  • The Discount Rate will be 15%

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Original data 2007 Units 500,000 Revenues Products Service Total revenue Expenses Cost of goods sold Administration Utilities Rent Depreciation Consultants Bad debt Total expenses 2008 Price Units 2009 Price 540,000 Units 577,800 $ 25,000,000.00 $ 50.00 $ 28,080,000.00 $ 52.00 $ 30,946,968.00 $ 1,500,000.00 $ 3.00 $ 1,593,000.00 $ 2.95 $ 1,675,620.00 $ 26,500,000.00 $ 53.00 $ 29,673,000.00 $ 54.95 $ 32,622,588.00 $ 10,000,000.00 $ 5,000,000.00 $ 200,000.00 $ 500,000.00 $ 500,000.00 $ 35,000.00 $ 15,000.00 $ 16,250,000.00 $ 20.00 $ 11,124,000.00 $ 10.00 $ 5,151,600.00 $ 0.40 $ 205,200.00 $ 1.00 $ 513,000.00 $ 1.00 $ 502,200.00 $ 0.07 $ 43,200.00 $ 0.03 $ 10,800.00 $ 32.50 $ 17,550,000.00 $ 20.60 $ 12,260,916.00 $ 9.54 $ 5,304,204.00 $ 0.38 $ 213,786.00 $ 0.95 $ 531,576.00 $ 0.93 $ 502,686.00 $ 0.08 $ 40,446.00 $ 0.02 $ 17,334.00 $ 32.50 $ 18,870,948.00 EBIT Margin $ 10,250,000.00 $ 20.50 $ 12,123,000.00 $ 22.45 $ 13,751,640.00 38.68% 40.86% 42.15% EBITDA Margin $ 10,750,000.00 $ 21.50 $ 12,625,200.00 $ 23.38 $ 14,254,326.00 40.57% 42.55% 43.69% 2009 Price $ 53.56 $ 2.90 $ 56.46 $ 21.22 $ 9.18 $ 0.37 $ 0.92 $ 0.87 $ 0.07 $ 0.03 $ 32.66 Compounded annual growth rate In units 7.50% In unit price 3.50% -1.68% 3.00% -4.19% -3.82% -4.08% -6.73% 0.00% 0.00% 2009 Units 577,800 Revenues Products Service Total revenue Expenses Cost of goods sold Administration Utilities Rent Depreciation Consultants Bad debt Total expenses $ 30,946,968.00 $ 1,675,620.00 $ 32,622,588.00 $ 12,260,916.00 $ 5,304,204.00 $ 213,786.00 $ 531,576.00 $ 502,686.00 $ 40,446.00 $ 17,334.00 $ 18,870,948.00 $ 23.80 EBIT Margin $ 13,751,640.00 42.15% $ 24.67 EBITDA Margin $ 14,254,326.00 43.69% 2009 2010 Price Units 2011 Price 621,128 Units 2012 Price 667,706 Units Price 717,776 $ 53.56 $ 34,431,596.04 $ 55.43 $ 38,308,593.14 $ 57.37 $ 42,622,140.03 $ 59.38 $ 2.90 $ 1,770,996.38 $ 2.85 $ 1,871,801.59 $ 2.80 $ 1,978,344.64 $ 2.76 $ 56.46 $ 36,202,592.42 $ 58.29 $ 40,180,394.73 $ 60.18 $ 44,600,484.67 $ 62.14 $ 21.22 $ 13,576,392.20 $ 9.18 $ 5,463,177.69 $ 0.37 $ 221,031.36 $ 0.92 $ 548,104.09 $ 0.87 $ 504,034.41 $ 0.07 $ 43,478.98 $ 0.03 $ 18,633.85 $ 32.66 $ 20,374,852.57 $ 21.86 $ 15,033,006.12 $ 8.80 $ 5,626,916.01 $ 0.36 $ 228,522.27 $ 0.88 $ 565,146.09 $ 0.81 $ 505,386.43 $ 0.07 $ 46,739.40 $ 0.03 $ 20,031.17 $ 32.80 $ 22,025,747.48 $ 22.51 $ 16,645,900.44 $ 8.43 $ 5,795,561.79 $ 0.34 $ 236,267.05 $ 0.85 $ 582,717.96 $ 0.76 $ 506,742.08 $ 0.07 $ 50,244.31 $ 0.03 $ 21,533.28 $ 32.99 $ 23,838,966.90 $ 23.19 $ 8.07 $ 0.33 $ 0.81 $ 0.71 $ 0.07 $ 0.03 $ 33.21 $ 23.80 $ 15,827,739.85 $ 25.48 $ 18,154,647.24 $ 27.19 $ 20,761,517.77 $ 28.92 43.72% 45.18% 46.55% $ 24.67 $ 16,331,774.25 $ 26.29 $ 18,660,033.67 $ 27.95 $ 21,268,259.85 $ 29.63 45.11% 46.44% 47.69% Forecast 2013 Units 2014 Price 771,601 Units 2015 Price 829,462 Units 2016 Price 891,662 Units 958,526 $ 47,421,392.24 $ 61.46 $ 52,761,040.15 $ 63.61 $ 58,701,932.32 $ 65.83 $ 65,311,768.85 $ 2,090,952.12 $ 2.71 $ 2,209,969.23 $ 2.66 $ 2,335,760.79 $ 2.62 $ 2,468,712.42 $ 49,512,344.36 $ 64.17 $ 54,971,009.38 $ 66.27 $ 61,037,693.12 $ 68.45 $ 67,780,481.27 $ 18,431,842.52 $ 5,969,262.09 $ 244,274.31 $ 600,836.19 $ 508,101.37 $ 54,012.05 $ 23,148.02 $ 25,831,476.54 $ 23.89 $ 20,409,398.70 $ 7.74 $ 6,148,168.40 $ 0.32 $ 252,552.94 $ 0.78 $ 619,517.77 $ 0.66 $ 509,464.30 $ 0.07 $ 58,062.32 $ 0.03 $ 24,883.85 $ 33.48 $ 28,022,048.28 $ 24.61 $ 22,599,127.29 $ 7.41 $ 6,332,436.77 $ 0.30 $ 261,112.14 $ 0.75 $ 638,780.20 $ 0.61 $ 510,830.89 $ 0.07 $ 62,416.32 $ 0.03 $ 26,749.85 $ 33.78 $ 30,431,453.45 $ 25.34 $ 25,023,792.31 $ 7.10 $ 6,522,227.89 $ 0.29 $ 269,961.41 $ 0.72 $ 658,641.55 $ 0.57 $ 512,201.14 $ 0.07 $ 67,096.82 $ 0.03 $ 28,755.78 $ 34.13 $ 33,082,676.90 $ 23,680,867.81 $ 30.69 $ 26,948,961.09 $ 32.49 $ 30,606,239.66 $ 34.32 $ 34,697,804.37 47.83% 49.02% 50.14% 51.19% $ 24,188,969.18 $ 31.35 $ 27,458,425.39 $ 33.10 $ 31,117,070.55 $ 34.90 $ 35,210,005.51 48.85% 49.95% 50.98% 51.95% 2016 2017 Price Units 2018 Price 1,030,404 Units 2019 Price 1,107,673 Units Price 1,190,735 $ 68.14 $ 72,665,872.84 $ 70.52 $ 80,848,048.82 $ 72.99 $ 89,951,537.66 $ 75.54 $ 2.58 $ 2,609,231.67 $ 2.53 $ 2,757,749.27 $ 2.49 $ 2,914,720.51 $ 2.45 $ 70.71 $ 75,275,104.51 $ 73.05 $ 83,605,798.09 $ 75.48 $ 92,866,258.17 $ 77.99 $ 26.11 $ 27,708,600.14 $ 6.80 $ 6,717,707.29 $ 0.28 $ 279,110.60 $ 0.69 $ 679,120.45 $ 0.53 $ 513,575.07 $ 0.07 $ 72,128.30 $ 0.03 $ 30,912.13 $ 34.51 $ 36,001,153.97 $ 26.89 $ 30,681,461.55 $ 6.52 $ 6,919,045.45 $ 0.27 $ 288,569.85 $ 0.66 $ 700,236.08 $ 0.50 $ 514,952.68 $ 0.07 $ 77,537.09 $ 0.03 $ 33,230.18 $ 34.94 $ 39,215,032.89 $ 27.70 $ 33,973,281.87 $ 6.25 $ 7,126,417.97 $ 0.26 $ 298,349.69 $ 0.63 $ 722,008.26 $ 0.46 $ 516,333.99 $ 0.07 $ 83,351.47 $ 0.03 $ 35,722.06 $ 35.40 $ 42,755,465.32 $ 28.53 $ 5.98 $ 0.25 $ 0.61 $ 0.43 $ 0.07 $ 0.03 $ 35.91 $ 36.20 $ 39,273,950.54 $ 38.12 $ 44,390,765.21 $ 40.08 $ 50,110,792.86 $ 42.08 52.17% 53.10% 53.96% $ 36.73 $ 39,787,525.61 $ 38.61 $ 44,905,717.89 $ 40.54 $ 50,627,126.85 $ 42.52 52.86% 53.71% 54.52% 2010 Cash flows from operating activities Profit before taxation $15,931,275 Adjustments for: Depreciation $502,686 Working capital changes: (Increase) / Decrease in trade and other receivables ($3,211,004) (Increase) / Decrease in inventories ($1,597,285) Increase / (Decrease) in trade payables $3,449,600 Cash generated from operations Tax @ 40% ($6,372,510) Net cash from operating activities $8,702,762 TEN-YEAR CASHFLOW FORECAST 2012 2013 2011 $18,456,382 $21,381,719 $24,770,721 $502,686 $502,686 $502,686 ($3,596,325) ($4,027,884) ($4,511,230) ($1,788,959) ($2,003,634) ($2,244,071) $3,863,552 $4,327,178 $4,846,440 ($7,382,553) ($8,552,688) ($9,908,288) $10,054,783 $11,627,377 $13,456,258 Cash flows from investing activities Leasehold improvements Capital expenditures Net cash used in investing activities ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) Cash flows from financing activities Net cash used in financing activities - - - - Net increase in cash and cash equivalents PVIF Present Value CF Net Present Value $8,642,762 $9,994,783 0.909 0.826 $7,856,271 $8,255,691 $100,246,960 $11,567,377 0.751 $8,687,100 $13,396,258 0.683 $9,149,644 CASHFLOW FORECAST 2014 2015 2016 2017 2018 2019 $28,696,880 $33,245,336 $38,514,721 $44,616,305 $51,691,465 $59,884,562 $502,686 $502,686 $502,686 $502,686 $502,686 $502,686 ($5,052,577) ($2,513,359) $5,428,012 ($5,658,886) ($2,814,962) $6,079,374 ($6,337,953) ($3,152,758) $6,808,899 ($7,098,507) ($3,531,089) $7,625,977 ($7,950,328) ($3,954,819) $8,541,083 ($8,904,367) ($4,429,397) $9,566,012 ($11,478,752) ($13,298,134) ($15,405,888) ($17,846,522) ($20,676,586) ($23,953,825) $15,582,890 $18,055,414 $20,929,707 $24,268,850 $28,153,501 $32,665,671 ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) ($10,000) ($50,000) ($60,000) - - - - - - $15,522,890 0.621 $9,639,715 $17,995,414 0.564 $10,149,413 $20,869,707 0.513 $10,706,159 $24,208,850 0.467 $11,305,533 $28,093,501 0.424 $11,911,644 $32,605,671 0.386 $12,585,789
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Assuming the residual value is equal to 0
Discount rate
Year

15%
Net cash flow
PVIF
2010 $ 8.642.762,00
2011 $ 9.994.783,00
2012 $ 11.567.377,00
2013 $ 13.396.258,00
2014 $ 15.522.890,00
2015 $ 17.995.414,00
2016 $ 20.869.707,00
2017 $ 24.208.850,00
2018 $ 28.093.501,00
2019 $ 32.605.671,00
Net present value (method 1)

0,870
0,756
0,658
0,572
0,497
0,432
0,376
0,327
0,284
0,247

Present value
$ 7.515.445,22
$ 7.557.491,87
$ 7.605.738,14
$ 7.659.353,99
$ 7.717.619,77
$ 7.779.914,07
$ 7.845.695,87
$ 7.913.916,01
$ 7.985.926,36
$ 8.059.623,20
$ 77.640.724,51

Assuming the residual value is different from 0
Purchase price
Residual value (e.g., 20% of purchase price)
Annual depreciation

5268000
1053600
421440

2010
Cash flows from operating activities
Profit before taxation
Adjustments for:
Depreciation
Working capital changes:
(...


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