Behr inc Is considering building large plant at Santa Ana to mass produce new paint. Management is analyzing this project over a short time horizon (4 yrs) using high discount rate (14% per year). Tax rate is 40%.

To reduce uncertainty, Behr has bought purchase options on two sites suitable for paint manufacturing. Once management decides whether to accept the project, it can decide which site is more suitable location and construct facility there. The Purchase option costs $5M.

Management estimates that constructing paint facility will cost $50M payable immediately. Construction will take one year to complete. Once the brewery is operational (after 1 year) management will begin to depreciate the facility to zero over 10 years using straight line depreciation. Management estimates that market value of facility will be $25M four years hence.

Once construction begins, management will spend 100M on equipment. Like facility construction, facility equipping will take one year. Equipment falls into 7 years MACRS life class. Depreciation percentages are year 1 20%, Year 2 30%, Year 3 20%, Years 4 to 8 5% each year. Behr may start depreciating the equipment once plant becomes operational. Management estimates that equipment will have market values of $50M four years hence. To pay for this capital expenses, Behr will sell immediately 100M in 30 yr Bonds rated A by S&P. The market currently requires a 5% annual return on 30 year A rated corporate bonds.

As the facility nears completion one year hence Behr will transfer to the facility equipment from a paint plant that is closing. Management estimates that this fully depreciated equipment will have a market value of $25M one year hence and market value of $10M four years hence.

Behr X would gain acceptance slowly. Behr X would also cut into sales of Behrs other products, leading management to schedule less production of Behrs limited sales brands. Lower production would also save production costs on these brands and hasten the recapture of Behrs investment in net working capital of those brands. Information shared below.

Behr needs NWC equal to 10% of coming year sales of those limited sale brands. Coinciding with equipment transfer, Behr will invest in Net working capital (Initially raw material inventories, cash equal to 10% of coming year sales each year. This investment will be recaptured at the end of project life.

Each year the plant in operation will allocate $10M in overhead costs to the project to reflect the plants share of Behrs administrative, marketing and product development expenses. Should Behr indulge in mass product of Behr X. Need NPV, Cash flow calculation, Proforma Income statement, ATCF.

Year	0	1	2	3	4
Unit prices, unit costs and depreciation
m bottles sold Behr X	0	0	60	100	200
$ per bottle Behr X	0	0	1.00	2.00	3.00
variable costs per bottle Behr X	0	0	0.60	1.20	1.80
m bottles not sold Limited sale product	0	0	2.00	20.00	40.00
$ per bottle Limited sale Product	0	0	1.00	1.50	1.80
variable costs per bottle Limited sale Product	0	0	0.80	1.20	1.40
MACRS dep %, New Equipment