## Description

EFN507 Assignment

There are two parts to the assignment, and the answer to each part must be

uploaded to a separate portal in blackboard. EFN507 Assignment – Flash Memory.

Please consult the HBS Case “Flash Memory, Inc.” Number 4230 for part A.

Part A (18 marks)

1. What is the appropriate discount rate that Flash should use to discount after-

tax free cash flows? Fully explain your reasoning and the assumptions

implicit in this statement. (5 marks). EFN507 Assignment – Flash Memory.

2. Under the assumption that Flash does NOT invest in the new project, forecast

the income statement and balance sheet for the years ended 2010, 2011, and

2012. (5 marks)

3. Should flash undertake the project? (5 marks)

4. You are concerned about three inputs to the NPV calculation: the size of the

required working capital, the size of the cost of good sold, and the amount to

be spent on advertising for product launch. In particular you are quite unsure

how accurate the numbers used to compute base-case NPV are. To account

for this uncertainty compute using a Monte Carlo simulation the standard

deviation of the NPV allowing for the required working capital as a

percentage of sales to be normally distributed with mean 26.15% of sales

and a standard deviation of 7.5%, and cost of goods sold to be normally

distributed with a mean of 79% of sales and a standard deviation of 7.5%;

and finally the advertising and promotion costs to be normally distributed

with mean $300K and standard deviation of 50K. Use at least 1000

simulations in your calculation and comment on the magnitude of the

variability in NPV across simulations. [See the file “Tutorial 3 Case Two

Monte Carlo Solution.xls” in Topic 3 of the blackboard site for a model

example of computing NPV using simulation, and the video referenced in the

tutorial itself.] (5 marks). EFN507 Assignment – Flash Memory.

NOTE: You should assume that the beta of debt is 0.2. EFN507 Assignment – Flash Memory.

Part B (10 marks). EFN507 Assignment – Flash Memory.

The standard way that we compute project value, or NPV, is to discount free cash

flows at the weighted average cost of capital. How and why does this method

account for the value of the tax shield on debt? What assumptions are required for

this approach to work? Are there any other ways to value these tax shields? When

might they bet better or worse than the current approach?. EFN507 Assignment – Flash Memory.