Year 0 1 2 3

CF -300 100 150 200

Y 10.00%

FCF1 FCF2 FCF3 FCFn

NPV  FCF0    
(1  y ) (1  y ) 2
(1  y ) 3 .......... .......... ....... (1  y ) n

D FCF -300 90.9 124.0 150.3

NPV 65.13899 NPV

FCF1 FCF2 FCF3 FCFn

0  FCF0    
(1  IRR ) (1  IRR ) (1  IRR ) .......... .......... ....... (1  IRR )n
2 3

IRR 20.61%
MIRR 17.74%
Reinvet. Rate 11%
1 2 3
-300 100 150 200
123.21 166.5 200

-300 489.71
367.926

67.92637

Discount rate = reinvestment rate

In IRR methodology the rate is driven mathematically

Rate in NPV is justified bc investors are rational

If IRR > Reinvestment Rate = Pay dividends

 0 1 2 3
FCF -300 100 150 200

y 10%
y* 11.00%

MIRR =
IRR
Invesment 1,250 Period (years) 0
in-kind contribution 250 Revenues
Variable costs/Sales 39%
Incremental fixed costs 95 Period (years)
Residual value 90 Production resources
Depretiation rate 12.50% Stock of ready goods
RecTR 21 Current liabilities
WACC 12%
Tax rate 19% + Recivables
+ Inventories
BV 350 - Account Payables
Cumulative depr. 1094 = Working Capital
End of period BV 406 Working capital investments

FCFF 0
Revenues
- Operational costs excluding depret.
= EBITDA
- Depreciation
= EBIT
- Tax *
= NOPAT
+ Depreciation
- Investements in Fixed Assets 250
- Working capital investments
= FCFF -250
+ Residual Value
= FCFF + RV -250

IRR 11.25%

D FCF -250.0

NPV -28.5
0
Cum FCF -250

years 5
part of years 0.2840239
PP in years 5.28
1 2 3 4 5 6 7
600 600 900 850 600 600 550

1 2 3 4 5 6 7
12 11 11 11 11 11 0
8 8 9 9 9 9 0
14 14 12 11 11 11 4

34.5 34.5 51.8 48.9 34.5 34.5 31.6

120 114 180 170 120 120 0
84 84 108 93.5 66 66 22
70.5 64.5 123.8 125.4 88.5 88.5 9.6
70.5 -6.0 59.3 1.6 -36.9 0.0 -78.9

1 2 3 4 5 6 7
600 600 900 850 600 600 550
329 329 446 426.5 329 329 309.5
271 271 454 423.5 271 271 240.5
156 156 156 156 156 156 156
115 115 298 267 115 115 84
22 22 57 51 22 22 16
93 93 241 216 93 93 68
156 156 156 156 156 156 156
1,250
70.5 -6.0 59.3 1.6 -36.9 0.0 -78.9
-1071 255 338 371 286 249 303
160
-1071 255 338 371 286 249 463

-956.5 203.4 240.7 235.8 162.3 126.3 209.5

1 2 3 4 5 6 7
-1321 -1066 -728 -357 -71 178 642
 Receiv. Days =receiv./sales*365
Residual value =WCn+MVFAn-(MVn-BVn)*T
=9,6-90-(90-406)*19%

Sensitivity analysis Sensitivity analysis

change of sales change of costs
0.00%
15% 15%
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10%
-15% -15%

Sensitivity analysis
change of CAPEX
0.00% -15% -10%
15% 15%
10% 10%
5% 5%
0% Sales 0%
-5% -5%
-10% -10%
-15% -15%
 Costs
-5% 0% 5% 10% 15%
 Own IT departmentOutsourced IT
Initial investment 400,000 0
Amortized amount 200,000 0
Depreciation rate 20% 0%
Cost 800,000 1,200,000
Cost growth 6% 10%
Additional revenue 90,000 0
Residual value 20,000 0
Tax 19% 19%
WACC 10% 10%

FCFF for own IT 1 2 3 4

Revenue 90,000 90,000 90,000 90,000
Costs w/o depr. 800,000 848,000 898,880 952,813
EBITDA -710,000 -758,000 -808,880 -862,813
- Depreciation 40,000 40,000 40,000 40,000
EBIT -750,000 -798,000 -848,880 -902,813
- Tax -142,500 -151,620 -161,287 -171,534
NOPAT -607,500 -646,380 -687,593 -731,278
+ Depreciation 40,000 40,000 40,000 40,000
- Investment 400,000 0 0 0
FCFF -967,500 -606,380 -647,593 -691,278
Residual Value
FCFF + RV -967,500 -606,380 -647,593 -691,278
DFCFF -879,545 -501,140 -486,546 -472,152

NPV -2,784,948

FCFF with project 0 1 2 3

Revenues 90,000 90,000 90,000
Operational costs excluding depret. 200,000 800,000 848,000 898,880
EBITDA -200,000 -710,000 -758,000 -808,880
Depreciation 40,000 40,000 40,000
EBIT -200,000 -750,000 -798,000 -848,880
Tax * -38,000 -142,500 -151,620 -161,287
NOPAT -162,000 -607,500 -646,380 -687,593
Depreciation 0 40,000 40,000 40,000
Investements in Fixed Assets 200,000
FCFF -362,000 -567,500 -606,380 -647,593
Residual Value
FCFF + RV -362,000 -567,500 -606,380 -647,593

IRR

D FCF -362,000 -515,909 -501,140 -486,546

NPV -2,785,671

Cum FCF

years
part of years
PP in years
 5 FCFF for outsourced IT 1 2
90,000 Revenue 0 0
1,009,982 Costs w/o depr. 1,200,000 1,320,000
-919,982 EBITDA -1,200,000 -1,320,000
40,000 - Depreciation 0 0
-959,982 EBIT -1,200,000 -1,320,000
-182,396 - Tax -228,000 -250,800
-777,585 NOPAT -972,000 -1,069,200
40,000 + Depreciation 0 0
0 - Investment 0
-737,585 FCFF -972,000 -1,069,200
20,000 Residual Value
-717,585 FCFF + RV -972,000 -1,069,200
-445,564 DFCFF -883,636 -883,636

NPV -4,418,182

4 5 FCFF without project 0 1

90,000 90,000 Revenues
952,813 1,009,982 Operational costs excluding depret. 1,320,000
-862,813 -919,982 EBITDA -1,320,000
40,000 40,000 Depreciation
-902,813 -959,982 EBIT -1,320,000
-171,534 -182,396 Tax * -250,800
-731,278 -777,585 NOPAT -1,069,200
40,000 40,000 Depreciation
Investements in Fixed Assets
-691,278 -737,585 FCFF 0 -1,069,200
16,200 Residual Value
-691,278 -721,385 FCFF + RV 0 -1,069,200

IRR

-472,152 -447,923 D FCF 0 -972,000

NPV

Cum FCF

years
part of years
PP in years
 3 4 5
0 0 0
1,452,000 1,597,200 1,756,920
-1,452,000 -1,597,200 -1,756,920
0 0 0
-1,452,000 -1,597,200 -1,756,920
-275,880 -303,468 -333,815
-1,176,120 -1,293,732 -1,423,105
0 0 0

-1,176,120 -1,293,732 -1,423,105

0
-1,176,120 -1,293,732 -1,423,105
 -883,636 -883,636 -883,636

2 3 4 5 FCFF difference
Revenues
1,452,000 1,597,200 1,756,920 1,932,612 Operational costs excluding depret.
-1,452,000 -1,597,200 -1,756,920 -1,932,612 EBITDA
Depreciation
-1,452,000 -1,597,200 -1,756,920 -1,932,612 EBIT
-275,880 -303,468 -333,815 -367,196 Tax *
-1,176,120 -1,293,732 -1,423,105 -1,565,416 NOPAT
Depreciation
Investements in Fixed Assets
-1,176,120 -1,293,732 -1,423,105 -1,565,416 FCFF
Residual Value
-1,176,120 -1,293,732 -1,423,105 -1,565,416 FCFF + RV

IRR

-972,000 -972,000 -972,000 -972,000 D FCF

NPV

Cum FCF

years
part of years
PP in years
 0 1 2 3 4 5
0 90,000 90,000 90,000 90,000 90,000
200,000 -520,000 -604,000 -698,320 -804,107 -922,630
-200,000 610,000 694,000 788,320 894,107 1,012,630
0 40,000 40,000 40,000 40,000 40,000
-200,000 570,000 654,000 748,320 854,107 972,630
-38,000 108,300 124,260 142,181 162,280 184,800
-162,000 461,700 529,740 606,139 691,827 787,831
0 40,000 40,000 40,000 40,000 40,000
200,000 0 0 0 0 0
-362,000 501,700 569,740 646,139 731,827 827,831
16,200
-362,000 501,700 569,740 646,139 731,827 844,031

149%

-362,000 456,091 470,860 485,454 499,848 524,077

2,074,329

-362,000 139,700 709,440 1,355,579 2,087,406 2,931,437

 RV in capital budgeting

Liquidation value => reinvestment creats NPV =< 0

Example 4 & 5

Simplified approach
FCF charge = reinvestment / nu

Additional example
After of period of exact FCF estimation an analyst predicts that a project w
FCF = 200 for very long period of time.
To achieve the result the company should reinvest =
300 each 5 years period.
Please calculate continuing value using both simplified and more advance
WACC 10%

Simplified:
FCF without reinvestment 200
Reinvestment 300
Number of years between reinv 5
FCF charge 60
FCF with reinvestment charge 140

CV 1400
CV = FCF * (1+g)/(r-g)
 RV in capital budgeting

Continuing value (perpetuity)

=> Reinvestment created NPV > 0

You need to calculate standardized FCF as basis for perpetuity calculation

FCF adjustments to reinvestment

Simplified approach Approach with financial mathematics principles

FCF charge = reinvestment / number of years PV = FCF charge * (1-(1+r)^-i)/r
FCF charge = PV * r/ (1-(1+r)^-i)

n analyst predicts that a project will create

oth simplified and more advanced approach

1 2
More advanced: 79.1 79.1
Investment (PV) 300 300.0 71.9 65.4
FCF charge 79
FCF with reinvestmen 121

CV 1208.6076
tics principles

3 4 5
79.1 79.1 79.1
59.5 54.1 49.1
f) tax rate is equal = 20%

Market value of fixed assets 100

Book value of fixed assets 0
Tax rate 20%
Market value of Fixed assets - Tax 80

Book value of goods and finished products 30

Expected margin 5%
Market value of goods and finished product 31.6
Market vvalue of goods ect - Tax 31.26

Book value of recivables 80

Losses on recivables 5%
Market value of recivables 76
Value of losses 4
Tax shield (reduction of taxes) 0.8
Market value of recivables + Tax shield 76.8

Account payables 23

RV 165.06
Budget 600

Present value of
Project NPV
investment outlays
A 400 600 150%
B 250 320 128%
C 350 350 100%
D 300 240 80%

B&C 600 670 112%