. ABC Co., makes and markets cars and toothpaste. It is considering a new factory to manufacture...
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Question:
. ABC Co., makes and markets cars and toothpaste. It is considering a new factory to manufacture televisions. The details of this 5-year project (i.e. initial investment followed by 5 years of operations) are as follows:
- Initial investment of $240,000
- 200 units will be sold each year for the five years.
- Price per unit sold of $500
- Variable cost per unit sold of $200
- Due to a special government incentive, the firm pays no tax
- The initial investment will be depreciated to 0 salvage with straight line depreciation over the life of the project
- As a result of the project the net working capital for the firm will go up by $60,000 at the end of year 1, another $65,000 (i.e. for a cumulative $125,000) at the end of the second year and will go down to its original (pre-project) level at the end of year 5
- Make the usual assumption that the initial investment takes place immediately and the five other cash flows come in at the end of each operating year
- ABC is an all equity firm and will remain so after the project which will be entirely funded by equity.
You are provided with the following details about a firm and its operating environment:
Risk free rate = 5%
Expected return on the market = 12%
of automotive division = 1.7
of toothpaste division = 0.9
for the firm as a whole = 1.3
There is one firm in the television manufacturing industry. It has an equity beta of 1.2 and a debt-equity ratio of 1:1. Assume beta of debt is zero for all firms.
Find the NPV for the project. Should the project be undertaken?
Related Book For
Introduction To Corporate Finance
ISBN: 9781118300763
3rd Edition
Authors: Laurence Booth, Sean Cleary
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