Question 2Considering the following information, calculate the Net Present Value of the Free Cash Flows, using the NPV function in Excel or Google Sheets:Weighted Average Cost of Capital: 5%Cash Flow in Year 1: 100Cash Flow in Year 2: 100Cash Flow in Year 3: 300Cash Flow in Year 4: -200Cash Flow in Year 5: 500Terminal Value: 1400
Question
Question 2Considering the following information, calculate the Net Present Value of the Free Cash Flows, using the NPV function in Excel or Google Sheets:Weighted Average Cost of Capital: 5%Cash Flow in Year 1: 100Cash Flow in Year 2: 100Cash Flow in Year 3: 300Cash Flow in Year 4: -200Cash Flow in Year 5: 500Terminal Value: 1400
Solution
To calculate the Net Present Value (NPV) of the Free Cash Flows, follow these steps:
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Open Excel or Google Sheets and create a new spreadsheet.
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In the first column, list the years from 0 to 5. In the second column, list the corresponding cash flows. For year 0, the cash flow is 0. For years 1 to 5, the cash flows are 100, 100, 300, -200, and 500 respectively.
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In the third column, calculate the present value of each cash flow. The formula for the present value is CF / (1 + r)^n, where CF is the cash flow, r is the weighted average cost of capital, and n is the year. For example, for year 1, the formula is 100 / (1 + 0.05)^1.
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Sum up the present values of the cash flows from year 1 to year 5. This is the NPV of the Free Cash Flows.
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To include the Terminal Value, calculate its present value using the formula TV / (1 + r)^n, where TV is the Terminal Value, r is the weighted average cost of capital, and n is the year. For the Terminal Value of 1400 in year 5, the formula is 1400 / (1 + 0.05)^5.
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Add the present value of the Terminal Value to the NPV of the Free Cash Flows. This is the total NPV.
Remember to replace 0.05 with the actual weighted average cost of capital if it's different.
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