ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DOT COM ASSESSMENT CASE PAPER ANALYSIS / TUTORIALOUTLET DO | Page 30

The next step will be calculating FCF taking into account OCF and
other incremental cash flows, including opportunity costs! At this
point we are still assuming that the project will last only for four
years.
 What will be the FCF (Free Cash Flow) each year?
WACC and CAPM
The next step will be estimating WACC. Using Yahoo Finance! or
other financial sources available on the course website find auto-
making industry’s beta, market risk premium and the risk free rate.
 Estimate the WACC using the earlier assumption about the
project’s financing and the CAPM equation for the cost of
equity.
Decision Criteria – NPV and IRR
Now you are ready to calculate the first criterion that is used to assess
projects.
 What will be the Net Present Value of the project?
You should also calculate another widely used criterion.
 What will be the IRR of the project?
Analyzing Risk using Scenario Analysis
You consider the electricity cost as one of the major factors affecting
your variable costs and would like to perform some additional
analysis to check the project’s sensitivity to electricity costs. As was
mentioned EIA has several electricity cost projections (Excel sheet,
tab Energy Prices Forecast). First you decide to see how your
recommendations might change under different cost scenarios.
 Perform scenario analysis on the electricity cost and present the
summary of results.
Break-even Analysis
Next, you would like to find the maximum electricity cost in year 1 at
which the project would still be advisable. For simplicity assume
0.5% annual growth of electricity costs.
 Find the break-even value for the electricity cost in year 1.
Monte Carlo Simulation
Finally, you would like to perform a Monte Carlo simulation. Possible
distribution assumptions are provided in Excel Spreadsheet tab
―Crystal Ball Simulation,‖ but you are welcome to make (and