A fabric selling firm FSP (Fabric Selling Products) is currently only in the sales and distribution business and hence has to procure the cotton fibre from elsewhere. They plan to integrate vertically in the value chain for which a project has been identified. Premium Nile Cottons (PNC), a govt. firm invited bids contract which will give ability for long term supply of cotton fibres for 10 years. We want to arrive at the best bid price for this project that would be an upfront non-amortized payment. The expected annual sales revenue of the cotton fibres to factories (using transfer pricing method) is provided in the table below. Total costs of production are 32% of the sales. The cotton thread spinning machinery would cost you 530 million. Depreciation is on an accelerated basis of 15%. You expect this machine to be sold for 10 million at the end of the 10 year period. As it is a new contract, the fim expects an initial investment of 18 million in net working capital. Subsequently, depending on revenues, the net working capital at year end would be 9% of the next year revenues. The fim expects to recover all the working capital by the end of the project's life. FSP had sent a contingent to evaluate the terrain and the promise of the Fabric reserves last year incurring a cost of 5 million. The effective tax rate at OCI is 20%. 1 2 3 4 5 6 7 8 9 10 Sales revenue (in millions) 500 550 600 700 750 750 600 500 400 400 Table 1: Projected Sales The company wants a right discount rate. The fim management has estimated the asset beta of the FSP Ltd as 1.2. The market risk premium is 8% and the risk free rate is 6%. In addition, the management thinks of the asset betas of upstream companies who to be in the range of 1.6 to 1.8. Compute the NPV of this project assuming that FSP plans to use all equity financing and compute the amount that can be bid for access to this site if the minimum NPV determined by management is 50 million after all costs are factored in. A fabric selling firm FSP (Fabric Selling Products) is currently only in the sales and distribution business and hence has to procure the cotton fibre from elsewhere. They plan to integrate vertically in the value chain for which a project has been identified. Premium Nile Cottons (PNC), a govt. firm invited bids contract which will give ability for long term supply of cotton fibres for 10 years. We want to arrive at the best bid price for this project that would be an upfront non-amortized payment. The expected annual sales revenue of the cotton fibres to factories (using transfer pricing method) is provided in the table below. Total costs of production are 32% of the sales. The cotton thread spinning machinery would cost you 530 million. Depreciation is on an accelerated basis of 15%. You expect this machine to be sold for 10 million at the end of the 10 year period. As it is a new contract, the fim expects an initial investment of 18 million in net working capital. Subsequently, depending on revenues, the net working capital at year end would be 9% of the next year revenues. The fim expects to recover all the working capital by the end of the project's life. FSP had sent a contingent to evaluate the terrain and the promise of the Fabric reserves last year incurring a cost of 5 million. The effective tax rate at OCI is 20%. 1 2 3 4 5 6 7 8 9 10 Sales revenue (in millions) 500 550 600 700 750 750 600 500 400 400 Table 1: Projected Sales The company wants a right discount rate. The fim management has estimated the asset beta of the FSP Ltd as 1.2. The market risk premium is 8% and the risk free rate is 6%. In addition, the management thinks of the asset betas of upstream companies who to be in the range of 1.6 to 1.8. Compute the NPV of this project assuming that FSP plans to use all equity financing and compute the amount that can be bid for access to this site if the minimum NPV determined by management is 50 million after all costs are factored in
