EFN507  Assignment – Flash Memory, Inc

EFN507  Assignment – Flash Memory, Inc

EFN507  Assignment
There are two parts to the assignment, and the answer to each part must be
uploaded to a separate portal in blackboard.
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)
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)
NOTE: You should assume that the beta of debt is 0.2.
Part B (10 marks)
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?

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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.