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Daniels New Frontiers Corporation ( DNFC ) is considering a contract for a 3 3 - year project from a ( government ) municipality. The
Daniels New Frontiers Corporation DNFC is considering a contract for a year project from a government municipality. The project would be "selfstanding" meaning that DNFC would be responsible for the project's costs of development, construction, and the expenses of running the operation. Still, the company would also receive all project revenues. From the municipality's vantage point, it hopes the project will have a positive economic impact on the town by increasing jobs and wages and perhaps increasing the town's population growth. The municipality has offered detailed financial information. As the most recently hired college graduate at DNFC and because of your degree in finance, your supervisor has asked you to evaluate the project and present your findings to the company's project evaluation committee. This is your first major assignment, and your reputation depends on the quality of your analysis and a good presentation. The development and construction of the project will take years, and the project will operate for years. The riskless rate is ; the rate of return on the market portfolio is and the project's beta is DCC has no debt. DNFC expects to spend $ for land one year after the contract is awarded Construction of the building will cost $ million, and the equipment will cost $ million, both of which will be cash outflows at The life of the building is years, and it will be depreciated toward a salvage value of $ The equipment has a fiveyear useful life with no salvage value. The equipment will be replaced at fiveyear intervals for $ million upon each replacement. Straightline deprecation will be used over years etc. To support operations, DNFC expects to need $ in additional cash, to invest $ in accounts receivable and $ in inventory, and to maintain $ in accounts payable. The investment in net working capital occurs at the start of operations The revenues from the project will amount to $ fixed costs will be $ and variable costs will be $ all on an annual basis. At the end of the project, the firm is expected to restore the surrounding area for $ The firm's marginal tax rate is The value of the land is expected to be constant over the project's life, and the building can be sold for $ at the end of the project. What is the minimum amount the municipality would have to pay DNFC when the contract is awarded t to make it worthwhile for DNFC to undertake the project?
Daniels New Frontiers Corporation DNFC is considering a contract for a year project from a
government municipality. The project would be "selfstanding" meaning that DNFC would be
responsible for the project's costs of development, construction, and the expenses of running the
operation. Still, the company would also receive all project revenues. From the municipality's vantage
point, it hopes the project will have a positive economic impact on the town by increasing jobs and
wages and perhaps increasing the town's population growth.
The municipality has offered detailed financial information. As the most recently hired college graduate
at DNFC and because of your degree in finance, your supervisor has asked you to evaluate the project
and present your findings to the company's project evaluation committee. This is your first major
assignment, and your reputation depends on the quality of your analysis and a good presentation.
The development and construction of the project will take years, and the project will operate for
years. The riskless rate is ; the rate of return on the market portfolio is and the project's beta is
DCC has no debt. DNFC expects to spend $ for land one year after the contract is awarded
Construction of the building will cost $ million, and the equipment will cost $ million, both of
which will be cash outflows at The life of the building is years, and it will be depreciated toward
a salvage value of $ The equipment has a fiveyear useful life with no salvage value. The
equipment will be replaced at fiveyear intervals for $ million upon each replacement. Straightline
deprecation will be used over years etc. To support operations, DNFC expects to need
$ in additional cash, to invest $ in accounts receivable and $ in inventory, and to
maintain $ in accounts payable. The investment in net working capital occurs at the start of
operations The revenues from the project will amount to $ fixed costs will be $
and variable costs will be $ all on an annual basis. At the end of the project, the firm is expected
to restore the surrounding area for $ The firm's marginal tax rate is The value of the land
is expected to be constant over the project's life, and the building can be sold for $ at the end of
the project.
What is the minimum amount the municipality would have to pay DNFC when the contract is awarded t
to make it worthwhile for DNFC to undertake the project?
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