You are the Chief Financial Officer and lead Project Development President for a snack. You are...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
You are the Chief Financial Officer and lead Project Development President for a snack. You are presented with a few options about what to do next for value-creation from your teams. However, you must evaluate each project and then make the ultimate choice on the project acceptance. The firm you work for is a large publicly traded company. It currently has 10,000,000 shares outstanding and 200,000 bonds outstanding. The company's most recently paid dividend was $3 per share, this dividend grows at 3% per year indefinitely. You also know that the company's current share price is $45. You also know that the beta of the firm is 1.2 and the expected return on the market is 9%. The most current rate offered on a T-bill was 1.9%. The bonds for the firm were all issued on the same day in the past, November 2010, and have a maturity date of November 2040. They pay 8% coupons, are paid semiannually, and were originally sold at full par value. These bonds possess an attractive yield and are currently priced at a premium, $1,200. The company tax rate is 21%. Project 1: This new project will create avocado chips. It will cost $25,000,000 today for a new building and machines. We would invest in NWC equivalent of 10% of capital expenditure cost today. We know that this project will bring in sales of $14,000,000 in the first year, at a rate of 25% for the first 2 years and growing at a rate of 12% for the next 4 years. We employ a MACRS 7-year depreciation scale for all CAPEX. In year-end 3, we will have to purchase $9,000,000 in new machines. Net working capital account will be 25% of sales for each year. Costs of goods sold will be 50% of sales until we get the new machines at which they will drop to 38% of sales. After year 6, we are quitting the entire project and liquidating all, we can sell the original machines for $4million and the new machines for $4million. This project is in line with a new product division that has similar risk levels to existing operations. MACRS 7-year MACRS 20-year 1 0.1429 0.0375 2 0.2449 0.07219 3 0.1749 0.06677 4 0.1249 0.06177 Project 2: This new project will be production of bamboo utensils (forks, knives, etc.). Bamboo is more sustainable than plastic, it can be reused, has natural antimicrobial properties, and is one of the fastest growing plants in the world. This project will cost $11,000,000 today to purchase the land and creation of the bamboo farm. It will cost $6,000,000 for the machines needed to process and produce the utensils. The farm will be depreciated as a 20- year MACRS class and the machines following the 7-year MACRS class. The first year of sales will be $7,000,000; however, we cannot begin selling until we have grown bamboo, so not until after year 2. The NWC needed today will be $1,000,000 and will simply be recovered at the end of the project life. Given our farming, we do not need to purchase the machines until the end of year 2. This project, from today, will last 8 years. At the end of year 8, we will sell our farm for a projected $15,000,000 and our machines are worthless. Sales will grow at a rate of 25% per year and costs will be 40% of revenues in year one and steadily decrease by 3% per year (e.g. next year will be .4(1- .03) COGS). This project is more risky and will require an 13% rate of return. 5 0.0893 0.05713 6 0.0892 0.05285 7 0.0893 0.0488 8 0.0446 0.04522 Which Project would you choose and why? You are the Chief Financial Officer and lead Project Development President for a snack. You are presented with a few options about what to do next for value-creation from your teams. However, you must evaluate each project and then make the ultimate choice on the project acceptance. The firm you work for is a large publicly traded company. It currently has 10,000,000 shares outstanding and 200,000 bonds outstanding. The company's most recently paid dividend was $3 per share, this dividend grows at 3% per year indefinitely. You also know that the company's current share price is $45. You also know that the beta of the firm is 1.2 and the expected return on the market is 9%. The most current rate offered on a T-bill was 1.9%. The bonds for the firm were all issued on the same day in the past, November 2010, and have a maturity date of November 2040. They pay 8% coupons, are paid semiannually, and were originally sold at full par value. These bonds possess an attractive yield and are currently priced at a premium, $1,200. The company tax rate is 21%. Project 1: This new project will create avocado chips. It will cost $25,000,000 today for a new building and machines. We would invest in NWC equivalent of 10% of capital expenditure cost today. We know that this project will bring in sales of $14,000,000 in the first year, at a rate of 25% for the first 2 years and growing at a rate of 12% for the next 4 years. We employ a MACRS 7-year depreciation scale for all CAPEX. In year-end 3, we will have to purchase $9,000,000 in new machines. Net working capital account will be 25% of sales for each year. Costs of goods sold will be 50% of sales until we get the new machines at which they will drop to 38% of sales. After year 6, we are quitting the entire project and liquidating all, we can sell the original machines for $4million and the new machines for $4million. This project is in line with a new product division that has similar risk levels to existing operations. MACRS 7-year MACRS 20-year 1 0.1429 0.0375 2 0.2449 0.07219 3 0.1749 0.06677 4 0.1249 0.06177 Project 2: This new project will be production of bamboo utensils (forks, knives, etc.). Bamboo is more sustainable than plastic, it can be reused, has natural antimicrobial properties, and is one of the fastest growing plants in the world. This project will cost $11,000,000 today to purchase the land and creation of the bamboo farm. It will cost $6,000,000 for the machines needed to process and produce the utensils. The farm will be depreciated as a 20- year MACRS class and the machines following the 7-year MACRS class. The first year of sales will be $7,000,000; however, we cannot begin selling until we have grown bamboo, so not until after year 2. The NWC needed today will be $1,000,000 and will simply be recovered at the end of the project life. Given our farming, we do not need to purchase the machines until the end of year 2. This project, from today, will last 8 years. At the end of year 8, we will sell our farm for a projected $15,000,000 and our machines are worthless. Sales will grow at a rate of 25% per year and costs will be 40% of revenues in year one and steadily decrease by 3% per year (e.g. next year will be .4(1- .03) COGS). This project is more risky and will require an 13% rate of return. 5 0.0893 0.05713 6 0.0892 0.05285 7 0.0893 0.0488 8 0.0446 0.04522 Which Project would you choose and why?
Expert Answer:
Answer rating: 100% (QA)
Here are the stepbystep calculations for Project 2 1 Calculate NPV for each period usin... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
You are the chief financial officer (CFO) of Palermo Products. You have been asked to analyze investment in new equipment to manufacture a new product. You will be asked to recommend whether or not...
-
In an attempt to identify ecologically friendly methods for controlling mosquito populations, researchers conducted eld experiments in India where aquatic nymphs of the dragony Brachytron pretense...
-
Find the projection of u onto v. Then write u as the sum of two orthogonal vectors, one of which is projvu. 1. u = (2, 2), v = (6, 1) 2. u = (0, 3), v = (2, 15)
-
Prepare journal entries to record the following adjustments: A. Revenue earned but not collected, nor recorded, $14,000 B. Revenue earned that had originally been collected in advance, $8,500 C....
-
Verify that in Example 9.6 the momentum transferred to the ball by the gravitational force is \(\Delta p_{x}=m_{\mathrm{b}}\left(v_{x, \mathrm{f}}-v_{x, \mathrm{i}} ight)\). Data from Example 9.6 A...
-
Swisscom AG, the principal provider of telecommunications in Switzerland, prepares consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Until 2007,...
-
19. Find the tension T for the system shown in figure :- T T T 1 kg 2 kg 3 kg (1) IgN (2) 2 gN (3) 5 gN (4) 6 gN 20. A ball of mass 0.5 kg moving with a velocity of 2 m/sec strikes a wall normally...
-
Execute the following SQL and draw the query tree for the SQL. Describe what kinds of access methods are used for each table. Explain which join method is used in each join operation. SELECT /*+...
-
How do cognitive and emotional processes interact to cultivate resilience in individuals facing adversities, and what neurobiological mechanisms underpin these processes?
-
1. (3 pts) Use a built-in Matlab function to find the solution to the following equation. x ex-1=0 2. (3 pts) Use a built-in Matlab function to determine the area under the curve for -1 x 1 for the...
-
what ways do psychological resilience and neuroplasticity intersect, and how do these phenomena contribute to an individual's capacity to cope with adversity and bounce back from setbacks?
-
How do principles of delegation intersect with organizational hierarchy and distributed decision-making structures, particularly in complex, multi-layered enterprises?
-
what ways does delegation serve as a mechanism for skill development and talent management within organizations, and how can it be leveraged to foster employee empowerment and career progression?
-
Walton Company makes and sells products with variable costs of $24 each. Walton incurs annual fixed costs of $441,160, The current sales price is $106. Note: The requirements of this question are...
-
Express mass density in kg/m3 and weight density in lb/ft3. 1. Find the mass density of a chunk of rock of mass 215 g that displaces a volume of 75.0 cm3 of water. 2. A block of wood is 55.9 in. x...
-
US Airways has more customer complaints due to late flights and mishandled baggage than any other major carrier. If you were an operations manager at US Airways, how might you use MBO to solve these...
-
The following questions are based on a Human Resources Capability Model developed by the Australian Public Service (APS) for HR managers who work in government agencies. People who work with HR...
-
The following questions are about your feelings toward communication with other people. Indicate the degree to which each statement applies to you by marking (5) Strongly agree, (4) Agree, (3)...
-
Go to the library or the Internet and, for a particular year, put together a data set of profits in agriculture in different geographical units of your state or country (e.g., counties of a U.S....
-
A very simple version of the normative model described in the text involves a simple economic growth process converging to a steady-state, where values do not change over time. \({ }^{14}\) A simple...
-
Suppose we have a small inhabited island with three residents and a volcano that generates air pollution. Two people live upwind of the volcano and one person lives downwind. For \(\$ 21,000\) we can...
Study smarter with the SolutionInn App