Berk/DeMarzo, Corporate Finance

Chapter 8 Tables and Examples

This workbook contains tables and examples from Chapter 8. Input formulas in
INSTRUCTIONS the shaded areas to recreate the tables in the book, and substitute your own
values for the bold blue numbers to see how the tables change.

HOMENET
KEY ASSUMPTIONS

Year 0 1 2 3 4 5
Key Assumptions
HomeNet
Units Sold (000s) 100 100 100 100
Sale Price ($/unit) 260 260 260 260
Cost of Goods ($/unit) 110 110 110 110
Existing Router
Units Sold (000s) 25% (25) (25) (25) (25)
Sale Price ($/unit) 100 100 100 100
Cost of Goods ($/unit) 60 60 60 60
Operating Expenses ($000s)
Hardware and Software
Development (15,000)
Marketing and Support (2,800) (2,800) (2,800) (2,800)
Lost Rent (200) (200) (200) (200)
Capital Expenditures
Lab Equipment (7,500)
Depreciation 20% 20% 20% 20% 20%
Marginal Corporate Tax Rate 40% 40% 40% 40% 40% 40%
Working Capital
Receivables (% of Sales) 15% 15% 15% 15%
Payables (% of COGS) 15% 15% 15% 15%

TABLE 8.1
HomeNet's Incremental Earnings Forecast
SPREADSHEET
Note: We assume that the company is globally profitable
Year 0 1 2 3 4 5
Incremental Earnings Forecast ($000s)
1 Sales - 26,000 26,000 26,000 26,000 -
2 Cost of Goods Sold - (11,000) (11,000) (11,000) (11,000) - Variable cost
3 Gross Profit - 15,000 15,000 15,000 15,000 -
4 Selling, General, and Administrative - (2,800) (2,800) (2,800) (2,800) -
5 Research and Development (15,000) - - - - - Pre-production = year 0 only
6 Depreciation - (1,500) (1,500) (1,500) (1,500) (1,500) Linear over 5 years
7 EBIT (15,000) 10,700 10,700 10,700 10,700 (1,500)
8 Income Tax at 40% 6,000 (4,280) (4,280) (4,280) (4,280) 600 At Corporate Level, we have Deferred Tax Assets, but this is proje
9 Unlevered Net Income (9,000) 6,420 6,420 6,420 6,420 (900) Consider this as a "good point", tax advantages for other projects
NOPAT = Net Operating Profi Don't capture "interest/financial income" here because just focus on decision on projects
Table 8.2 HomeNet's Incremental Earnings Forecast Including Cannibalization and
SPREADSHEET Lost Rent

Year 0 1 2 3 4 5
Incremental Earnings Forecast ($000s)
1 Sales - 23,500 23,500 23,500 23,500 - Minus Los
2 Cost of Goods Sold - (9,500) (9,500) (9,500) (9,500) - plus sav
3 Gross Profit - 14,000 14,000 14,000 14,000 -
4 Selling, General, and Administrative - (3,000) (3,000) (3,000) (3,000) - Plus Lost
5 Research and Development (15,000) - - - - -
6 Depreciation - (1,500) (1,500) (1,500) (1,500) (1,500)
7 EBIT (15,000) 9,500 9,500 9,500 9,500 (1,500)
8 Income Tax at 40% 6,000 (3,800) (3,800) (3,800) (3,800) 600
9 Unlevered Net Income (9,000) 5,700 5,700 5,700 5,700 (900)

Table 8.4
HomeNet's Net Working Capital Requirements
SPREADSHEET

Year 0 1 2 3 4 5
Net Working Capital Forecast ($000s) Inventory
1 Cash Requirements - - - - - - + Receivables
2 Inventory No additional inventory - Payables
3 Receivables (15% of Sales) - 3,525 3,525 3,525 3,525 -
4 Payables (15% of COGS) - (1,425) (1,425) (1,425) (1,425) -
5 Net Working Capital - 2,100 2,100 2,100 2,100 -
Increase in WC 2,100 - - - (2,100)

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 Berk/DeMarzo, Corporate Finance
Chapter 8 Tables and Examples

Net WC = Delta Non-cash (Assets - Liab)

Table 8.3 Calculation of HomeNet's Free Cash Flow (Including Cannibalization and
SPREADSHEET Lost Rent)

Year 0 1 2 3 4 5
Incremental Earnings Forecast ($000s)
1 Sales - 23,500 23,500 23,500 23,500 -
2 Cost of Goods Sold - (9,500) (9,500) (9,500) (9,500) -
3 Gross Profit - 14,000 14,000 14,000 14,000 -
4 Selling, General, and Administrative - (3,000) (3,000) (3,000) (3,000) -
5 Research and Development (15,000) - - - - -
6 Depreciation - (1,500) (1,500) (1,500) (1,500) (1,500)
7 EBIT (15,000) 9,500 9,500 9,500 9,500 (1,500)
8 Income Tax at 40% 6,000 (3,800) (3,800) (3,800) (3,800) 600
9 Unlevered Net Income (9,000) 5,700 5,700 5,700 5,700 (900)

Free Cash Flow ($000s)

10 Plus: Depreciation - 1,500 1,500 1,500 1,500 1,500 Add back
11 Less: Capital Expenditures (7,500)
12 Less: Increases in NWC - (2,100) - - - 2,100
13 Free Cash Flow (16,500) 5,100 7,200 7,200 7,200 2,700

Table 8.5
Computing HomeNet's NPV
SPREADSHEET
2020 2,021
Year 0 1 2 3 4 5
Net Present Value ($000s)
1 Free Cash Flow (16,500) 5,100 7,200 7,200 7,200 2,700
2 Project Cost of Capital 12% time erosion
3 Discount Factor 1.000 0.893 0.797 0.712 0.636 0.567 =1/(1+r)^n
4 PV of Free Cash Flow (16,500) 4,554 5,740 5,125 4,576 1,532
5 NPV 5,026
NPV 4,487
IRR

SUMMARY SUMMARY SPREADSHEET: COMBINED EARNINGS/FCF/NPV

Year 0 1 2 3 4 5
Incremental Earnings Forecast ($000s)
1 Sales
2 Cost of Goods Sold
3 Gross Profit
4 Selling, General, and Administrative
5 Research and Development
6 Depreciation
7 EBIT
8 Income Tax at 40%
9 Unlevered Net Income
Free Cash Flow ($000s)
10 Plus: Depreciation
11 Less: Capital Expenditures
12 Less: Increases in NWC
13 Free Cash Flow
Net Present Value ($000s)
14 Project Cost of Capital 12%
15 Discount Factor
16 PV of Free Cash Flow
17 NPV

Table 8.6
NPV Cost of Outsourced Versus In-House Assembly of HomeNet
SPREADSHEET

Year 0 1 2 3 4 5
Outsourced Assembly ($000s)
1 EBIT
2 Income Tax at 40%
3 Unlevered Net Income
4 Less: Increases in NWC
5 Free Cash Flow
6 NPV at 12%

Year 0 1 2 3 4 5
In-House Assembly ($000s)
1 EBIT

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 Berk/DeMarzo, Corporate Finance
Chapter 8 Tables and Examples

2 Income Tax at 40%

3 Unlevered Net Income
4 Less: Increases in NWC
5 Free Cash Flow
6 NPV at 12%

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 Berk/DeMarzo, Corporate Finance
Chapter 8 Tables and Examples

Table 8.7
HomeNet IRR Calculation
SPREADSHEET

Year 0 1 2 3 4 5
NPV ($000s) and IRR
1 Free Cash Flow
2 NPV at 12%
3 IRR

Table 8.9
Best- and Worst-Case Parameter Assumptions for HomeNet
SENSITIVITY ANALYSIS

Current Worst Base Best Breakeven

Units Sold: $f$9 70 100 130 79.8
NPV 5026

Sale Price: $f$10 260 240 260 280 232

NPV 5026

Cost of Goods $f$11 110 120 110 100 138

NPV 5026

Net Working Capital #VALUE! 3000 2100 1600 17545

change relative to current $f$61 onal inventory #VALUE! #VALUE! #VALUE! #VALUE!
NPV 5026

Cannibalization $d$13 25% 40% 25% 10% 95.9%

NPV 5026

Cost of Capital $d$90 12% 15% 12% 10% 24.11%

NPV 5026

Table 8.10
Scenario Analysis of Alternative Pricing Strategies
SCENARIO ANALYSIS

Two-Way Data Table (row $e$6, column $e$7)

Units Sold (000s)
5,026 90 100 110 120
Price per Unit ($) 245
260
275
280

Sale Price Units NPV

Current Strategy 260 100 5025.968
Price Reduction 245 110 4582.569
Price Increase 275 90 4937.288