You are evaluating a 5-year expansion project for a mid-sized commercial payments business and need to present a valuation view to senior management. The team wants a discounted cash flow analysis rather than a simple payback because the project has upfront investment, ongoing operating cash flows, and a terminal value. Assume USD reporting and unlevered free cash flow to the firm. You need to explain what DCF measures, why discounting matters, and whether the project creates value.
| Metric | Value |
|---|---|
| Initial investment at Year 0 | $120,000,000 |
| Year 1 unlevered FCF | $18,000,000 |
| Year 2 unlevered FCF | $22,000,000 |
| Year 3 unlevered FCF | $26,000,000 |
| Year 4 unlevered FCF | $30,000,000 |
| Year 5 unlevered FCF | $34,000,000 |
| Terminal growth rate after Year 5 | 3.0% |
| Discount rate (WACC) | 10.0% |
How would you explain DCF and its importance in valuation, and based on these cash flows what enterprise value and net present value would you calculate for the project? What would you recommend if the discount rate or terminal growth assumption moved modestly?