Free Cash Flows

Project 2 – Capital Budgeting AnalysisThe ProjectYou are a financial analyst who reports to the CFO at a private university. Your manager hasasked you to determine if the Business School should launch an Online Executive MBAProgram. The program details follow:The program is slated to run for five years and then be re-evaluated. The program requires aninvestment in software that costs $2,500,000. The software will be purchased in year 0 anddepreciated straight line to zero over the 5-year program period. At the end of five years, it isassumed that the software will have a salvage value of $20,000. The online Executive MBAProgram will take students one year to complete. Tuition is $48,000 per student. Tuitionassistance in the form of scholarships and/or grant funding provided by the university is expectedto discount tuition expenses per student (tuition revenues per student to the university) at anaverage rate of 15%. Enrollment isexpected to be 35 students in the inaugural year (year 1) withgrowth of 20% expected each year. The program’s Net Working Capital requirements areestimated to be 6% of non-discounted tuition revenue with full recovery at the end of theprogram period. In addition, the university requires 5% of non-discounted tuition revenue to beincluded as allocated overhead charges. (Note: Allocated overhead will primarily covertechnical support to the program that is provided by the university’s central “Help Desk”. Totalfaculty and staff salaries for the program are estimated to be$300,000 in the inaugural year withgrowth of 3.5% expected each year. Launching the Online Executive MBA program is expectedto reduce revenues from the traditional MBA program by 10% each year. The most recentannual revenue from the traditional MBA program is $1,650,000. Historical revenue growth forthe traditional MBA program has been 5% per year. Assume the university’s tax rate = 0.30 andwacc = 10%.InstructionsDevelop a project analysis spreadsheet in Excel to determine Free Cash Flows (FCFs) for theOnline Executive MBA program anddetermine the Net Present Value (NPV). Based on youranalysis, draft a brief memo to the CFO that provides your recommendation on launching theprogram.What you are to submit to me by emailSubmit your memo to the CFO and the Excel workbook used to complete your analysis.

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