EXPANSION AT EAST COAST YACHTS Because East Coast Yachts is producing at full capacity, Larissa has decided to have Dan examine the feasibility of a new manufacturing plant. This expansion would represent a major capital outlay for the company. A preliminary project analysis has been conducted at a cost of $1.2 million. This analysis determined that the new plant would require an immediate outlay of $55 million and an additional outlay of $30 million in one year. The company has received a special tax dispensation that will allow the building and equipment to be depreciated on a 20-year MACRS schedule. Because of the time necessary to build the new plant, no sales will be possible for the following year. The company will have partial-year sales of $18 million in two years from now. Sales in the following four years will be $27 million, $35 million, $39 million, and $43 million. Because the new plant will be more efficient than East Coast Yachts' current manufacturing facilities. Variable costs are expected to be 60 percent of sales, and fixed costs will be $3.5 million per year. The new plant will also require net working capital amounting to 8 percent of sales for the next year. Dan realizes that sales from the new plant will continue into the indefinite future. Because of this, he believes the cash flows after Year 5 will continue to grow at 3 percent indefinitely. The company's tax rate is 21 percent, and the required return is 11 percent. Larissa would like Dan to analyze the financial viability of the new plant and calculate the profitability index. NPV, and IRR Also, Larissa has instructed Dan to disregard the value of the land that the new plant will require. East Coast Yachts already owns it, and, as a practical matter, it will go unused indefinitely. She has asked Dan to discuss this issue in his report. Question You need to determine the following before you can find the requested information: Step 1: OCF Step 2: Capital spending Step 3: Net working capital Step 4: Terminal value in Year 5 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 OCF Capital spending Net working capital Terminal value ______________________________________________________________________ Total cash flows Tips for completing the assignment Chapter 8 Case Study You need to do is calculate the depreciation of the equipment that will occur in years 1-5. You need to use Table 8.3 for calculating MACRS depreciation and not straight-line depreciation. They are two different methods. Calculate the Net Working Capital years 1-5. Calculate the Operating Cash Flows for each year. Calculate the perpetual cash flows beyond year 5. Calculate the total cash flows Use the total cash flows for finding the requested metrics in the problem. Tips for calculation of NPV Use the Excel function NPV and include the required return of the project and the cash flows from years 2-5. Subtract out the initial investment in year 1. Tip for calculating IRR The Excel function IRR cannot be used because it contains perpetual cash flows. As a result, you should use the solver function. Solve for IRR, NPV, PI, and excel formulas reference Ross, Corporate Finance: Core Principles and Applications, 6th Edition. ISBN: 978-1-260-01389-4