1. Cash flow forecast
Forecast the monthly expected cash flows for your team’s capital budgeting project for the first three years of operation. Assume the project is funded entirely with equity. Cash flow forecasts will include:
a. The initial investment for the project, which includes at least:
the cost of land,
building and equipment,
organizational expenses, and
initial net working capital, as appropriate for the project.
You may assume purchase of a turn-key operation or forecast cash flows during construction and/or during a pre-operational start-up period.
b. Monthly operating cash inflows and outflows for the first thirty-six months of project operation. This requires that you estimate or make assumptions about:
the level of sales,
the initial price of the product or service,
the amount and cost of required inputs including raw materials, labor, administrative costs, growth rates in demand, inflation rates, taxes, etc., and
growth rates for units sold and inflation rates for prices and costs.
Some of these cash flows may be forecast as a percent of sales; others will be fixed or will depend on time rather than sales.
Operating cash flow appropriately account for:
depreciation (use MACRS),
taxes (assume for this case a corporate tax rate of 35% and to simplify calculation assume taxes are payable each month and operating losses generate a cash inflow based on the tax rate),
changes in net working capital due, e.g., to increased inventory to support increased sales, and
any additional capital investment required during the first three years of operation.
Assume cash balances held as part of working capital accrue no interest and all excess cash flows are paid out in the month received (so no interest need be calculated on excess funds held in the project).
(Note: Since the project is funded entirely with equity, do not include any interest or principal payments in the cash flow forecasts.)
c. Estimate the value of the business as of the end of month 36 (the horizon value) using at least two different methods.