Looking at various projects to determine which projects we should pursue.

1. FINC 560 Final Project
Presented by: Wilson Robles, Elisa Aponte,
Marian Ekladious and Frank Cunha

2. Marian EkladiousFrank Cunha Frank Cunha
Project valuation
analysis review
for a budget
meeting.
4
Keystone Industries
is evaluating a
proposal to build a
plant that will
manufacture
lightweight trucks.
3
Sports Unlimited
analysis of the value
of their equity using
methods as APV,
WACC, and FTE.
5
AGENDA
Elisa Aponte
International Paper
(IP) is considering
expanding its
production capacity by
purchasing a new
machine, TJ-50.
2
Wilson Robles
Vornado Realty
Trust (VNO) is
evaluating six real
estate
investments.
1

3. Wilson Robles
Vornado Realty
Trust (VNO) is
evaluating six real
estate
investments.
1
• Management’s goal is to buy the
properties today and sell them in 5 years
• Sussex Ridge
• Orchard Estates
• Lakeville
• Seaside
• Greenville
• Westlake
• Capital budget is $18 Million to invest

4. • Given a budget of $18 Million VNO
should choose the Sussex Ridge,
Seaside, and Westlake properties.

5. $12
Million
Given a
budget of

6. 0 1 2 3 4 5
• Reject OE because Cost exceeds
the $12 Million budget
• Therefore with a budget of
$12MM VNO should pick Sussex
Ridge and Westgate giving a
maximum NPV of $28,596,300

7. Disruption caused by installation will
decrease sales by $5 Million this
year. Next year once machine is
operating, COGS is expected to be
70% of their sale price. Increased
production will require additional
inventory of $1 Million.
OPERATIONS
Once operating, the extra
capacity is expected to
generate $10 Million/
year in additional sales
for 10 years.
MARKETING
Expansion will require
additional sales and
administrative personal at
a $2 Million per year cost.
TJ-50 will depreciate via
straight-line method over 10
year life. Expected receivables
from new sales to be 15% of
revenues and payables to be
10% of COGS with a marginal
corp. tax of 35%.
ACCOUNTINGElisa Aponte
International Paper
(IP) is considering
expanding its
production capacity by
purchasing a new
machine, TJ-50.
2
HUMAN RESOURCES
International Paper’s Feasibility Study Estimates

9. TJ-50

10. TJ-90

11. a. Determine the incremental earnings from the
purchase of the TJ-50. Year 2-10 $471,250
b. Determine the free cash flow from the purchase of the
TJ-50. Year 2-10 $746,250
c. If the appropriate cost of capital for the expansion is
10%, compute the NPV of the purchase. NPV
($164,587)
d. While the expected new sales will be $10 million per
year from the expansion, estimates range from $8
million to $12 million.
What is the NPV in the worst case? ($2,471,593)
In the best case? $2,142,418
e. What is the break-even level of new sales from the
expansion? $10,142,685
What is the break-even level for the cost of
goods sold? 69.55%
Summary
f. IP could instead purchase the TJ-90, which offers
even greater capacity. The cost
of the TJ-90 is $4 million. The extra capacity would
not be useful in the first two years of
operation, but would allow for additional sales in
years 3–10. What level of additional sales
(above the $10 million expected for the TJ-50) per
year in those years would justify
purchasing the larger machine?
IP needs additional sales of $11,384,281 million in
years 3-10 for TJ-90, larger machine, to have a
higher NPV than TJ-50. The NPV is zero when
evaluating the TJ-90 machine alternative so this
means that investment earns a rate of return equal
to 10% (the discount rate). TJ-90 is a better option.

12. Frank Cunha
Keystone Industries
is evaluating a
proposal to build a
plant that will
manufacture
lightweight trucks.
3
• Keystone plans to use a cost of capital of
12% to evaluate this project
• NPV for this base-case scenario:

13. Sensitivity of
NPV – increase:

14. Sensitivity of
NPV – decrease:

15. Alternative
assumptions

18. Marian Ekladious
Project valuation
analysis review
for a budget
meeting.
4
preparing the initial analysis used the flow-
to-equity valuation method and discounted
the cash flows using the company’s equity
cost of capital of 11%
Associate
to borrow $80 Million and
repay over 4 years
Company
equity cost of capital will likely
to be higher than company.
Associate’s method of using FTE
approach is not a good analysis
Project’s
incremental leverage is
different from the the
company’s historical debt-
equity ratio of .20
Project’s

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5
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2
4
6
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2016 2017 2018 2019
• Since there is predetermined
debt levels, the APV method is
the easiest to use in this case
• After computing the APV, the
project actually has a negative
value of -3.4
• The NPV of the interest tax
shield would have to at least
be double of it’s value in order
for the project to have a
positive value
Summary

22. Frank Cunha
Sports Unlimited
analysis of the value
of their equity using
methods as APV,
WACC, and FTE.
5
10%Unlevered Cost
of Capital at
15%Unlevered Cost
of Capital at

23. 10%Unlevered Cost
of Capital at
15%Unlevered Cost
of Capital at
Equity using the APV
method

24. 10%Unlevered Cost
of Capital at
15%Unlevered Cost
of Capital at
Equity value using
the WACC method

25. 10%Unlevered Cost
of Capital at
15%Unlevered Cost
of Capital at
Equity cost of capital if
cost of capital is 5%

26. 10%Unlevered Cost
of Capital at
15%Unlevered Cost
of Capital at
Equity value using
the FTE method

27. 0 1 2 3 4 5
- $40M = $85M
- $40M = $48.7M

28. THANK YOU