Premium Essay

Encom

In: Business and Management

Submitted By eavf
Words 1344
Pages 6
EnCom Corporation
STAGE ONE QUESTIONS: 1. What is the total initial investment that is required at the beginning of the first period in order to start EnCom?
Total initial investment = $1,000 + $720 = $1,720

2. Compute the value of EnCom immediately after the initial investment at the beginning of period one using the discounted free cash flow method. (End of) Period | 1 | 2 | 3 | 4 | 5 | 6 | Discount Factor at 10% | 0.9091 | 0.8264 | 0.7513 | 0.6830 | 0.6209 | 0.5645 | DCF Valuation | | | | | | | Cash Inflows | 600 | 1,200 | 1,200 | 1,200 | 1,200 | 600 | Cash Outflows | (720) | (720) | (720) | (720) | 0 | 0 | Free Cash Flow | (120) | 480 | 480 | 480 | 1,200 | 600 | DCF Valuation | (109) | 396.69 | 360.63 | 327.85 | 745.11 | 338.68 | | | | | | DCF | 2,059.87 |

3. Compute EnCom’s internal rate of return. IRR | 14.76% | | | 4. Prepare financial statements (income statements and balance sheets) for EnCom for each of the five periods that it is in business. Income Statement | Y1 | Y2 | Y3 | Y4 | Y5 | Revenue | 1,200 | 1,200 | 1,200 | 1,200 | 1,200 | Cost of Goods Sold | 720 | 720 | 720 | 720 | 720 | Depreciation | 200 | 200 | 200 | 200 | 200 | Net Income | 280 | 280 | 280 | 280 | 280 |

Balance Sheet | Y1 | Y2 | Y3 | Y4 | Y5 | Accounts Receivable | 600 | 600 | 600 | 600 | 600 | Inventory | 720 | 720 | 720 | 720 | 0 | PP&E | 800 | 600 | 400 | 200 | 0 | Book Value of Equity | 2,120 | 1,920 | 1,720 | 1,520 | 600 |

5. Compare Encom’s free cash flows and earnings for each of the five periods. Overall, which of the two measures do you think provides the best measure of EnCom’s periodic performance? Why?
Earnings, from my point of view, provide the best measure of EnCom’s periodic performance because it reflects the best matching of revenues and expenses. In cash flow the connection

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