Free Cash Flows

Project 2 – Capital Budgeting Analysis
The Project
You are a financial analyst who reports to the CFO at a private university. Your manager has asked you to determine if the Business School should launch an Online Executive MBA Program. The program details follow:

The program is slated to run for five years and then be re-evaluated. The program requires an investment in software that costs $2,500,000. The software will be purchased in year 0 and depreciated straight line to zero over the 5-year program period. At the end of five years, it is assumed that the software will have a salvage value of $20,000. The online Executive MBA Program will take students one year to complete. Tuition is $48,000 per student. Tuition assistance in the form of scholarships and/or grant funding provided by the university is expected to discount tuition expenses per student (tuition revenues per student to the university) at an average rate of 15%. Enrollment is expected to be 35 students in the inaugural year (year 1) with growth of 20% expected each year. The program’s Net Working Capital requirements are estimated to be 6% of non-discounted tuition revenue with full recovery at the end of the program period. In addition, the university requires 5% of non-discounted tuition revenue to be included as allocated overhead charges. (Note: Allocated overhead will primarily cover technical support to the program that is provided by the university’s central “Help Desk”. Total faculty and staff salaries for the program are estimated to be $300,000 in the inaugural year with growth of 3.5% expected each year. Launching the Online Executive MBA program is expected to reduce revenues from the traditional MBA program by 10% each year. The most recent annual revenue from the traditional MBA program is $1,650,000. Historical revenue growth for the traditional MBA program has been 5% per year. Assume the university’s tax rate = 0.30 and wacc = 10%.
Instructions
Develop a project analysis spreadsheet in Excel to determine Free Cash Flows (FCFs) for the Online Executive MBA program and determine the Net Present Value (NPV). Based on your analysis, draft a brief memo to the CFO that provides your recommendation on launching the program.
What you are to submit to me by email
Submit your memo to the CFO and the Excel workbook used to complete your analysis. For more information on Free Cash Flows visit this: https://en.wikipedia.org/wiki/Free_cash_flow

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