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Explain in details by Excel if possible please The electricity company Taurus Inc. hires you to evaluate the acquisition of a wind power plant. The
Explain in details by Excel if possible please
The electricity company Taurus Inc. hires you to evaluate the acquisition of a wind power plant. The plant's basic acquisition price is $100 million, and would cost another $20 million to modify it for special use by the firm. The plant belongs to the MACRS 5-year class asset, and would be liquidated at the end of Year 5 (when the project life is over) for an estimated $40 million at market value. (Note: MACRS 5-year- class plan 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76% to be depreciated for Year 1, 2, 3, 4, 5 and 6, respectively.) --- The wind power plant is expected to increase Taurus's electricity sales revenue by $45 million at Year 1, thereafter growing by 4% per year till the end of project life. The plant will also increase Taurus operating costs (i.e., COGS + SGA expenses) by $17 million at Year 1, thereafter growing by 5% per year till the end of project life. Net operating working capital of each year equals 15% of sales revenue projected for the subsequent year. The side effects and opportunity costs of this new power plant are negligible. Taurus's WACC is estimated to be 8.50% based on its existing business risk level. All cash flows and WACC are provided in real (deflated) amounts. Taurus also has a time-constraint policy that requires the full initial investment to be paid back within 5 years. The newly effective federal-plus-state tax rate for the future years 24%. QUESTIONS: 1) What is the net free cash flow amount of this wind power project for Years 0, 1, 2, 3, 4 and 5, respectively? 2) Should Taurus purchase the wind power plant or not, provided such a development will not considerably alter Taurus's existing business risk level? 3) Assume Taurus has another investment alternative: to upgrade the existing "fuel-fired power plant, costing free cash outflow of $50 million at Year 0 and then generating a net free cash flow of $25 million at Year 1, $20 million at Year 2, $15 million at Year 3, $10 million at Year 4, $5 million at Year 5, $1 million at Year 6, and negative $5 million at Year 7. Also assume (a) both the wind and fuel plant projects are repeatable (renewable) instead of one-time deal, and (b) these two power plant projects are mutually exclusive. Which power plant(s) shall be builtStep by Step Solution
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