TasK-2

Cash flow to the capital In $ millions

A) Years 0 1 2 3 4 5
development expense -20
Investments -70
Sale of V-2 (Note-1) 0 51.50 58.35 66.11 74.90
Sale of V-1 (Note-2) 20.60 15.91 10.93 5.63
Variable cost ( Note-1) -23.18 -26.26 -29.75 -33.71 -38.19
Fixed costs -10.3 -10.609 -10.927 -11.255 -11.593
Depreciation -14.42 -11.536 -9.2288 -7.383 -5.9064
-90.00 -27.30 19.01 19.37 19.39 19.21
Loss adjusted -21.54 -8.08
11.29
Tax @ 22% 0.00 0.00 -2.48 -4.27 -4.23
Depreciation 14.42 11.54 9.23 7.38 5.91
-90.00 -12.88 30.55 26.12 22.51 20.89

Marketing Expense -5.15 - - - -

Working capital (Note-3) -28.8 -0.9 -1.1 -1.4 -4.3 -4.9
Total cash flows -118.84 -18.89 29.44 24.72 18.23 16.04

DF @ 8.5% 1.00 0.92 0.85 0.78 0.72 0.67

PV ### (17.41) 25.01 19.35 13.15 10.67

NPV=82.76

Explanation
Cash flow from sales of V-2 are taken with delay of one year as vroom give one year payment deferral
Cash flow from sales of V-1 are taken for four years as it will be discontinued afterwards
Variable cost is taken at 45% sales of V-1 and V-2
Depreciation is calculated at 20% reducing balance method
All cash flows have been inflated from year one by 3%
Sales of V-2 have been inflated by 3% from year one and 10% from year two
Cash flows are discounted at WACC and also inflated

Note-1
V-2
1 0 1 2 3 4 5 6
50.00 Sales 51.50 58.35 66.11 74.90 84.86 96.15

Cash flow 51.50 58.35 66.11 74.90 84.86

 -22.5 Varibale cost (45% of sales) 23.18 26.26 29.75 33.71 38.19 43.27

-14.00 Depreciation 14.00 11.20 8.96 7.17 5.73 4.59

-14.000 14.420 11.536 9.229 7.383 5.906 4.725

Note-3
Working capital 40% of next years sales
0 1 2 3 4 5 6
Sales of V-1 & V-2 72.10 74.26 77.04 80.53 91.24 103.38

Working capital ### 29.71 30.81 32.21 36.50 41.35 46.85

### 0.87 1.11 1.40 4.28 4.85 5.50

Incremental Working capital ### -0.87 -1.11 -1.40 -4.28 -4.85 -5.50
B)
Working capital refers to the finance required by company to run its daily operations .
Usually company gets in major financing from its debtors to finance daily operations like accounts payable and othe
Vrooms need for woking capital makes sense as it needs to spend more on expenses and its operation then what it
Further it has also given one year deferral payment option to its customers which also contributes shortfall in cash

Year -1 Year -1
Real Nominal
cash cash
flow flow
C)
Cash flow at year one -31.5 -18.89
DF @ 5.4% 0.94877
DF @ 8.5% 0.92166
PV -29.886 -17.41

Note-4
Inflated cost of capital:
1+Nominal= (1* (1+General inflation rate)
1+Nominal= (1* (1+3%) Real Cash Flow is the cas
1+Nominal= 1* 1.03 Nominal Cash Flow is the
1+Nominal= 1 Likewise real cash flow is
Nominal= 0 and nominal cash flow is
Nominal= 9
 6 7 8 9 10 11

84.86 96.15 108.94 123.43 139.84 158.44

-43.27 -49.02 -55.54 -62.93 -71.30 0.00

-11.941 -12.299 -12.668 -13.048 -13.4392 0
-4.7251 -3.7801 -3.0241 -2.4193 -1.93542
24.93 31.05 37.71 45.03 53.17 158.44

-5.48 -6.83 -8.30 -9.91 -11.70 -34.86

4.73 3.78 3.02 2.42 1.94 0.00
24.17 28.00 32.43 37.54 43.41 123.59

- - - - - -
-5.5 -6.2 -7.1 -8.0 68.1
18.67 21.77 25.37 29.55 111.54 123.59

0.61 0.56 0.52 0.48 0.44 0.41

11.44 12.30 13.21 14.18 49.33 50.38

e year payment deferral

Note-2
V-1
7 8 9 10 0 1 2 3
108.94 123.43 139.84 158.44 Sales 20 15 10
20.6 15.9135 10.92727
96.15 108.94 123.43 139.84 158.44
 49.02 55.54 62.93 71.30

3.67 2.94 2.35 1.88

3.780 3.024 2.419 1.935

7 8 9 10
117.12 132.70 150.35 170.35

53.08 60.14 68.14 0.00

6.23 7.06 8.00

-6.23 -7.06 -8.00

accounts payable and other expensesbut when company faces a shortfall in finance it get it additional financing from other sources like lo
d its operation then what it will be receiving every year.
ontributes shortfall in cash flow

Real cash flow

Sale of V-2 (Note-1 0

Sale of V-1 (Note-2 20
Variable cost ( Not -22.5
Fixed costs -10
Depreciation -14
-26.5
tax 0
Marketing Expens -5 1 2
Working capital 0 70 70
-31.5 28 28

Real Cash Flow is the casf flow that is not inflated which is -31.5
Nominal Cash Flow is the cash flow is the one that is inflated which is -18.89
Likewise real cash flow is discounted at real cost of capital which is 5.4%
and nominal cash flow is discounted at nominal cost of capital whuch is 8.5%
 4
5
5.627544
g from other sources like loan.
 0

#REF!
 WACC Market value Cost

Bond Loan 59,900,000 59.9 W-1 13.30%

Share capital 100 1.10%

Serial loan 17.5 3%

177.4

Explanation:
Cost of debt of bond loan is calculated by calculating IRR of cash flows.
Value of loan at year 0 will be market value
Interest is calculated at 3% of face value after dedcuting 22% tax.
Redemption of loan will be done at face value
Net present value is calculated at 5% and 2%
Apply formula of IRR in which both rates and NPV at rates is taken

Cost of equity is calculated by first of all calculating Ke1 at 6% growth rate

Dividend is calculated at the 8th year after compounding growth at 6%
Terminal value of dividend is calculated at year 8 as growth to infinity is 4%
Terminal value of dividend is then discounted at 3% rate to calculate present value.
Ke2 is calculated from present value of dividend calculated earlier.

As no repayment terms of loan are provided it is assumed that loan is repayed proportionately ov
Therefore 2.5M will be repayed every year and principle amount of loan after 5 years will be 17.5
cost will be 3% after dedcuting 22% tax.

W-1
Cost of debt 0 1-20 20
Mv -59.9
50,000,000 Interest (1- 1.17 -1.17
redemption 50
-59.9 -1.17 50
DF @ 5% 1 12.46 0.37688
-59.9 -14.5782 18.844

NPV -55.63
 DF @ 2% 1 16.35 0.6729
-59.9 -19.1295 33.645

NPV -45.38

IRR= 2% + -45.38 *
10.25

IRR 0.133
IRR 13.30%

1 (B) Share price of vroom

0 1 2
Dividend 10 10.6
Terminal value of dividend
10 10.6
DF @ 8.5% 0.922 0.849
PV 9.217 9.004

68.724

As dividend was paid at half year therefore no cash flow will be taken at year 0
Present value of dividend will be calculated after taking the impact of growth every
terminal value of dividend will be calculated for dividend growth after 8 years
all cash flow will be dicounted at wacc
 WACC

0.04491

0.00620

0.00296
0.05407
WACC 5.407%

growth rate

o infinity is 4%
lculate present value.

t loan is repayed proportionately over the course of 20 years.

unt of loan after 5 years will be 17.5M

Cost of equity:
Dividend valuation method with constant growth
Ke1= 10(1+0.06) +
100

= 10.6 +
100
= 0.106 +
= 0.166
Ke1= 16.60%
 Dividend at 8 year 15.94

terminal value of dividend= 16.5776

12.6
(5%-2%) terminal value of dividend= 1.32
Present value of dividend = 1.04

Ke2= 1.10028
100
Ke2= 1.10%

3 4 5 6 7 8
11.236 11.9 12.6 13.4 14.2 15.0
1.3
11.236 11.9 12.6 13.4 14.2 16.3
0.783 0.722 0.665 0.613 0.565 0.521
8.797 8.594 8.396 8.203 8.014 8.501

be taken at year 0
mpact of growth every
wth after 8 years
 Serial loan

0.06 30 = 2.5/year
20

0.06 2.5*5 = 12.5

0.06 Principle amount of loan after 5 years

30-12.5 17.5
 9
15.6 = 16.26321
12.6

= 1.290476
The project should be carried out as it will generate positive NPV.
Positive NPV shows that project will create value for sharelholders
It will brings returns on the investments done on the project.
Company investment is utilized in correct project
Company doesnot seem to have working capital issues as company is doing the prodcution at profit.
Major source of company financing is from banks to fund the project and to manage its working capital which is sai
Prospects of business growth are positive as company sales is increasing and will be tripled 10 years time
cution at profit.
ts working capital which is said tro be risk free investment.
ripled 10 years time