Calculation of HBL’s NPV using the estimated FCFs and WACC

 

To calculate HBL’s NPV, we need to discount the estimated FCFs using the WACC. We have estimated HBL’s FCFs for the next 10 years, and have also calculated the terminal value of the project. The terminal value represents the value of the project at the end of the 10-year period, assuming that the project will continue to generate cash flows beyond the forecast period.

Using the WACC of 9.37%, we calculate HBL’s NPV to be $3.05 million.
Discussion of the NPV results and their implications
The positive NPV of $3.05 million indicates that the proposed investment is expected to generate a return greater than the required rate of return. This suggests that the investment is financially viable and should be considered by Tucker Hansson. However, it is important to note that the NPV is sensitive to changes in key project variables, and it may be necessary to conduct a sensitivity analysis to better understand the risks associated with the investment.
Sensitivity Analysis
Explanation of sensitivity analysis and its purpose
Sensitivity analysis is a method used to evaluate the impact of variations in project assumptions on the project’s financial performance. The aim of conducting sensitivity analysis is to observe how a change in some key project variables would make the project stronger or weaker. The purpose of conducting sensitivity analysis is to provide decision-makers with an understanding of the range of possible outcomes and to identify the critical factors that influence the project’s success.
Identification of the key project variables
In this section, we identify the key project variables that could influence the investment decision. These variables include the price of raw materials, labor costs, production volumes, and discount rates.