Introduction

As of late 2019, Toyota Motor Corporation has twelve engineering and manufacturing facilities in the United States. Recently, Toyota has been considering expanding the production of their electrified vehicles (EV) in the U.S. To enable the expansion, they are contemplating investing $1.5 billion at the end of 2023 (Year 0) in a new plant with an expected 10-year life. In the meantime, they also need to invest $30 million upfront in net working capital before the production can take place.

The projected financials of the new project for the Year 1 operation (2024) are as follows:

Earnings before interest and taxes (EBIT): Depreciation expense: Increase in net working capital:

$170 million $150 million $40 million

The anticipated unlevered free cash flows from the new plant will grow by 5% for each of the next two years (Years 2 and 3) and then 2% per year for the remaining seven years. As a newly hired MBA in the capital budgeting division, you have been asked to evaluate the new project using the WACC method. You will estimate the cash flows and compute the appropriate cost of capital and the net present values. Assume that Toyota's corporate tax rate is 21%.

In the sheet "Toyota's cost of capital", estimate the project's unlevered free cash flows from Year 0 to Year 10 (or equivalently from Year 2023 to 2033, the end year of the project).