Question
Beats wants to build a new factory to produce its headphones. It will cost $160 million initially to build the factory over the course of
Beats wants to build a new factory to produce its headphones. It will cost $160 million initially to build the factory over the course of 12 months, which will be worthless after 10 years. The factory will be depreciated linearly to $0 over 10 years. Beats already owns the land on which the factory will be built. The land is currently worth $10 million and was purchased for $2 million eight years ago.
After completion of the factory at the end of year 1, Beats expects earnings before interest and taxes (EBIT) of $35 million each year for 10 years. The company also has to add inventory (components) worth $6 million just before operation starts at the end of the first year.
Beat's marginal tax rate is 21% and the appropriate cost of capital for this project is 10%.
Part 1
What is net capital spending in year 0, i.e., at the start of the project (in $ million)?
Part 2
What is the cash flow from assets in year 0 (in $ million)?
Part 3
What is the cash flow from assets in year 1 (in $ million)?
Part 4
What is the annual depreciation in year 2 (in $ million)?
Part 5
What is the cash flow from assets in year 2 (in $ million)?
Part 6
What is the cash flow from assets in year 11 (in $ million)?
Part 7
What is the NPV of this project (in $ million)?
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