Stage 2 of EnCom Example
⚫An incremental investment project is
available to EnCom, with data as follows:
1. Compute the value of EnCom with the
incremental project immediately after the
2. Compute EnCom’s IRR with the incremental
investment project.
Solution (double click to see computations)
End of Period 0 1 2 3 4 5 6
Discount Factor at 10% 1.0000 0.9091 0.8264 0.7513 0.6830 0.6209 0.5645
DCF Valuation
Cash Inflows 0 750 1,350 1,350 1,200 1,200 600
Cash Outflows –1,720 –1,020 –720 –720 –720 0 0
Free Cash Flow –1,720 –270 630 630 480 1,200 600
DCF –1,720.00 –245.45 520.66 473.33 327.85 745.11 338.68
DCF Valuation 2,160.17
IRR 16.03%
Stage 2 Questions
3. Assume that EnCom accounts for the
incremental marketing project by expensing
all marketing costs in the period that they are
incurred. Prepare financial statements for
each of the five periods under this accounting
assumption. Do you think that this accounting
assumption is aggressive, conservative or
neutral?
Solution (double click to see formulas)
0 1 2 3 4 5 6
Income Statement
Revenue 0 1,350 1,350 1,350 1,200 1,200 0
Cost of Goods Sold 720 720 720 720 720 0
Depreciation 0 200 200 200 200 200 0
Marketing Costs 300 0 0 0 0 0
Net Income 0 130 430 430 280 280 0
Dividends –1,720 -270 630 630 480 1,200 600
Balance Sheet
Accounts Receivable 0 600 600 600 600 600 0
Stage 2 Questions
4. Assume that EnCom accounts for the
incremental marketing project by capitalizing
marketing costs and then amortizing them in
proportion to the benefits received. Prepare
financial statements for each of the five
periods under this accounting assumption.
Do you think that this accounting assumption
is aggressive, conservative or neutral?
Solution (double click to see formulas)
0 1 2 3 4 5 6
Income Statement
Revenue 0 1,350 1,350 1,350 1,200 1,200 0
Cost of Goods Sold 720 720 720 720 720 0
Depreciation 0 200 200 200 200 200 0
Amortization 100 100 100 000
Net Income 0 330 330 330 280 280 0
Dividends –1,720 -270 630 630 480 1,200 600
Capitalized Marketing Costs 0 200 100 0 0 0 0
Book Value of Equity 1,720 2,320 2,020 1,720 1,520 600 0
ROE 19.19% 14.22% 16.34% 16.28% 18.42%
5. Assume that EnCom accounts for the incremental
marketing project by capitalizing marketing costs and
then expensing all of these costs in the first period in
which no benefits are received from the project.
Prepare financial statements for each of the five
periods under this accounting assumption. Do you
think that this accounting assumption is aggressive,
conservative or neutral?
Solution (double click to see formulas)
0 1 2 3 4 5 6
Income Statement
Revenue 0 1,350 1,350 1,350 1,200 1,200 0
Cost of Goods Sold 720 720 720 720 720 0
Depreciation 0 200 200 200 200 200 0
Write-Off 0 0 0 300 0 0
Net Income 0 430 430 430 –20 280 0
Dividends –1,720 -270 630 630 480 1,200 600
Balance Sheet
Accounts Receivable 0 600 600 600 600 600 0
Inventory 720 720 720 720 720 0 0
PP&E 1,000 800 600 400 200 0 0
Stage 2 Questions
6. Which of the above three accounting methods
do you think provides the best measure of
EnCom’s periodic performance? Why?