Question
A utility company that currently provides electricity to residents of Broward County using coal-fired power plants has WACC of 9%. The company's new CEO is
A utility company that currently provides electricity to residents of Broward County using coal-fired power plants has WACC of 9%. The company's new CEO is looking into getting into a new project where the company is going to collect highly radioactive material from asteroid in space and will use that material to generate electricity. This is expected to reduce the cost of producing electricity. The initial investment in the project is $640 million. A newly hired Nova graduate has done the following analysis. His analysis contains multiple errors. Identify the errors, correct them, Calculate true NPV assuming that NI forecasts for the years are OK and that there are no relevant cash flows beyond 2022. Recommend a course of action. (Hint: make appropriate assumptions if required. There is no right answer. I want to see if you can identify the errors, make proper adjustments and assumption and complete the project.) [10]
EBITDA | 300 | 325 |
Depreciation | 55 | 55 |
EBIT | 245 | 270 |
Interest | 45 | 45 |
EBT | 200 | 225 |
Tax | 80 | 90 |
NI | 120 | 135 |
|
|
|
Cash Flows (NI + Dep) | 175 | 190 |
|
|
|
NPV calculation at beginning of 2015 | ||
Discount rate | 9% |
|
| t | CF |
1 | 0 |
|
2 | 0 |
|
3 | 0 |
|
4 | 175 |
|
5 | 190 |
|
6 | 211 |
|
7 | 223 |
|
8 | 223 |
|
PV of FCF | $607.18 |
|
NPV = | ($32.82) |
|
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