6. (30 points) You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 % and an expected growth rate of 5% after 2003. 2000 2001 2002 2003 60,000 1998 1999 15,000 5,500 Net Sales 35,500 8,500 3,100 100 46,000 18,000 52,000 20,000 Cost of Sales 13,900 100 24,400 Depreciation 100 100 100 100 SG&A 3,500 5,410 6,400 5,300 7,200 7,800 7,000 20,700 7.245 13,455 6,500 18,200 R&D 1,100 5,400 2,800 1,190 4,100 11,000 3,850 7,150 EBIT 700 Income Tax (35%) Net Earnings Depreciation Operating Cash Flows 17,200 6,020 11,180 245 455 6,370 11,830 417 774 Net PPE (906) (2,030) (1394) (780) (900) (2457) (800) (1267) (300) (738) (200) (912) Working Capital Terminal Value Free Cash Flows a) Calculate the free cash flows for 1998 – 2003. b) Calculate the terminal value of the Canopy project in 2003 and the adjusted free cash flow value for 2003. (HINT: Use the Gordon or Growing Perpetuity Model to calculate the terminal value). c) Calculate the NPV, the IRR and the payback period for the Canopy project and recommend whether Canopy should go forward with the expansion project or not.
6. (30 points) You are considering a geographic expansion into the European market for Canopy Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 % and an expected growth rate of 5% after 2003. 2000 2001 2002 2003 60,000 1998 1999 15,000 5,500 Net Sales 35,500 8,500 3,100 100 46,000 18,000 52,000 20,000 Cost of Sales 13,900 100 24,400 Depreciation 100 100 100 100 SG&A 3,500 5,410 6,400 5,300 7,200 7,800 7,000 20,700 7.245 13,455 6,500 18,200 R&D 1,100 5,400 2,800 1,190 4,100 11,000 3,850 7,150 EBIT 700 Income Tax (35%) Net Earnings Depreciation Operating Cash Flows 17,200 6,020 11,180 245 455 6,370 11,830 417 774 Net PPE (906) (2,030) (1394) (780) (900) (2457) (800) (1267) (300) (738) (200) (912) Working Capital Terminal Value Free Cash Flows a) Calculate the free cash flows for 1998 – 2003. b) Calculate the terminal value of the Canopy project in 2003 and the adjusted free cash flow value for 2003. (HINT: Use the Gordon or Growing Perpetuity Model to calculate the terminal value). c) Calculate the NPV, the IRR and the payback period for the Canopy project and recommend whether Canopy should go forward with the expansion project or not.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:6. (30 points) You are considering a geographic expansion into the European market for Canopy
Pharmaceuticals. Below are the incremental cash flows for the Canopy project for you to use in your
analysis. Assume Canopy's marginal tax rate is 35%, their cost of capital is 15.7 % and an expected
growth rate of 5% after 2003.
1998
1999
2000
2001
2002
2003
60,000
24,400
Net Sales
8,500
3,100
15,000
5,500
35,500
13,900
46,000
18,000
100
5,300
52,000
20,000
Cost of Sales
Depreciation
100
100
100
100
100
SG&A
3,500
5,410
6,400
7,200
7,800
6,500
7,000
20,700
7.245
13,455
R&D
1,100
2,800
1,190
417
4,100
11,000
3,850
7,150
5,400
17,200
6,020
11,180
ЕBIT
700
Income Tax (35%)
Net Earnings
Depreciation
Operating Cash Flows
18,200
6,370
11,830
245
455
774
(900)
(2457)
(300)
(738)
Net PPE
(906)
(2,030)
(1394)
(780)
(800)
(1267)
(200)
Working Capital
(912)
Terminal Value
Free Cash Flows
a) Calculate the free cash flows for 1998 – 2003.
|
b) Calculate the terminal value of the Canopy project in 2003 and the adjusted free cash flow value
for 2003. (HINT: Use the Gordon or Growing Perpetuity Model to calculate the terminal value).
c) Calculate the NPV, the IRR and the payback period for the Canopy project and recommend whether
Canopy should go forward with the expansion project or not.
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