Mutually Exclusive FinanceThe sales fore cast for Working Computers Inc regarding the PDA device-Bernoulli. Sales forecast statement if the required investment $18 million dollars are provided. The sales was forecasted along with the revenues after and before tax were also provided. The following is a Sales forecast along with Cash flow. Table: 1No of units soldSales price of each UnitCost of Units SoldOperating expensesRevenue on SalesTotal cost =cost +O. CCash flow before taxCash flow after tax2004150000$495445500001069200074250000552420001900800064627202005189000$495561330001347192093555000696049202395008081430272006246000$505745380001937988124230000764759884775401216236364.082007246000$5107527600019571760125460000948477603061224010408161.62008264000$5108078400021003840125460000101787840236721608048534.42009264000$51581576000212097601359600001027857603317424011279241.6Sales forecast for Bernoulli device if Working Inc declines to provide the required investment of $18 million for enhancement of PDA features. Table: 2No of units soldSales price of each UnitCost of Units SoldOperating expensesRevenue on SalesTotal cost =cost +O. CCash flow before taxCash flow after tax2004150000$495445500001069200074250000552420001900800060825602005102000$495302940003181939.25049000033475939.217014060.8872092.288200657000$49516929000406296028215000209919607223040872092.288200748000$49514688000342144023760000181094405650560872092.288200848000$495142560003421440 237600001767744060825605231001.6200948000$495142560003421440237600001767744060825605231001.6Using the above information following discounted cash flow analysis was done and prepared for the present value In doing this first it was assumed that the investment is not provided today and the forecasting till 2009 was taken into consideration.
Later DCF is calculated assuming that the investment is provided today and forecasting till 2009 was taken into consideration. Adopted from http: //www. investopedia. com/terms/d/dcf. aspCash flow for the year 2004 = $608260 Cost of capital (r) = 14.5 ; DCF = CF/(1+r)1 = 6082560/(1+14.5)1 = 392423.23Cash flow for the year 2005 =872092.29 Cost of Capital (r) = 14.5; DCF = CF/(1+r)2 = 3629.94 Cash flow for the year 2006 = 872092.29 Capital Cost = 14.5, DCF = CF/(1+r)3 = 872092.29 /(1+14.5)3 = 234.19Cash flow for year 2007 = 872092.29 Capital cost = 14.5, DCF = CF/(1+r)4= 872092/(1+14.5)4 =15.1 Cash flow for year 2008 = 5231001.6 Cost of capital = 14.5; Discounted cash flow =CF/(1+r)5= 5231001.6/(15.5)5 = 5.85Cash flow for year 2009 = 5231001.6 Cost of capital =14.5: Discounted Cash flow = CF/(1+r)6= 5231001.6/(15.5)6= 0.36DCF = 392423.3 + 3629.94+ 234.19+15.1+5.85+0.36 = 396308.74The resultant amount is less than the cost of investment 2610000.
So if the investment required to enhance the Bernoulli PDA is not provided the continuance of the instrument is not viable for the company. Discounted cash flow assuming that the required investment is provided at the present day, which is on 01-01-04. Cash flow for year 2004 = $646720, Cost of capital = 14.5; Discounted Cash flow = CF/(1+r)n = 6462720/(15.5)1= 416949.68Cash flow for year 2005 = $8143027, Cost of capital =14.5; Discounted Cash flow = CF/(1+r)n= 8143027/(15.5)2 = 33893.97Cash flow for year 2006 = $16236364.08, Cost of capital =14.5 Discounted cash flow = CF/(1+r)3= 16236364.08/(15.5)3= 4360.07Cash flow for year 2007 = $10408161.6, Cost of capital =14.5 Discounted Cash flow = CF/(1+r)4= 10408161.6/(15.5)4= 180.32Cash flow for year 2008 =$18048534.4 Cost of capital =14.5; Discounted cash flow =CF/(1+r)n = 18048534.4/(15.5)5 = 23Cash flow for year 2009 = $11279241.6 Cost of Capital = 14.5; Discounted cash flow = CF/(1+r)n = 11279241.6/(15.5)6 = 0.81Discounted cash flow from 2004 through 2009= 416949.68+ 33893.97 + 4360.07 + 180.32 + 23 + 0.81 = 455407.85The discounted cash flow from 2004 through 2009 is more than the cost of capital of investment.
So the continuance of Bernoulli device is possible if the required investment is provided. If the company is not in a mood to provide the required investment it is suggested that the device can be sold to the competitors. According to the discounted cash flow it was clear that the calculated DCF is less than cost of capital if it is not provided and it is more than it if it is provided.
This result suggests that, if the company wants to continue the manufacturing of it, the required investment for the enhancement of the device must be provided. While suggesting terminal value the stable growth model is taken into consideration as the investment $18million dollars recommended for maintaining stable growth or to grow continuously by enhancing the device. This is not only considered soundest technically and also requires judgments about when the firm will grow at a stable rate which it can continue for ever.
Here that time is taken as 2009 and thereafter it can be recommended that it can grow stable and sustain that growth.