Answered step by step
Verified Expert Solution
Question
1 Approved Answer
ABC company is considering producing a new range of smartphones that will require it to build a new factory. Feasibility studies have been done on
ABC company is considering producing a new range of smartphones that will require it to build a new factory. Feasibility studies have been done on the factory which cost $5 million. The studies have found the following: 1. The factory will cost $24 million and will have a useful life of 20 years. 2. The factory will be depreciated on a straight line basis and will have a salvage value of $0 but it is believed that most of it can be sold for scrap after 20 years for $50000. 3. Due to the nature of the business they are in, they will have to perform some environmental tests to make sure that some of the chemicals they are using are not entering the ground water around the factory. These tests will be performed every 5 years and cost $625000. 4. The project will generate $5 million in revenue in the first year which will increase by 1% per year for 10 years, then remain stable for 5 years and then decrease by 1% per year for the last 5 years of the project. 5. The extra costs that the company accrues per year due to the project are $385000 for labour, $65000 for overhead like power and water bills and marketing costs for the new line of phones will be $480000 per year but will decrease by $15000 per year as the phone gains greater penetration. 6. The company's current cost of capital is 8% per year. 7. The tax rate is 30%. 8. The project requires an initial investment in working capital of $1000000 that is returned in year 20. Use the above information to answer the following. A. Calculate the free cash flows that come from this project for the 20 years it is operational. (20 Marks)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started