Logitech Technology Company Ltd plans to open a new factory in Beijing, China. Logitech uses a sixyear planning horizon for all of its capital budgeting decisions. The following cash flows are noted for the project:

a. The factory will be built on a piece of land near the Logitechs existing warehouse. The land will be purchased at a cost of $100 million and is expected to be worth $150 million in 6 years.

b. The construction fee of the factory is $180 million. The factory will be depreciated at its full cost on a straight line basis over its estimated useful life of twelve years. The factory is expected to be sold at $50 million at the end of the project.

c. Machinery will have to be purchased for the factory at a cost of $60 million. For tax purpose, machinery will be fully depreciated at its full cost (i.e. to zero value) on a straight-line basis over its estimated useful life of six years. Salvage value of the machinery at the end of Year Six is estimated to be 10% of its original cost. If fixed asset is fully depreciated, salvage value is considered as a cash income to Logitech.

d. Specialized equipment will also have to be purchased at a cost of $12 million. The equipment will also be depreciated at its full cost on a straight-line basis over its estimated useful life of six years, with a zero estimated salvage value.

e. In addition, an initial investment of $20 million in working capital is required today and at the end of Year Two. All of the working capital will be fully recovered at the end of project.

The management of Logitech believes that the new factory will generate pre-tax cash operating income of $80 million a year in its first three years of operation and $160 million in each of the subsequent three years. Logitechs tax rate is 25% and its cost of capital is 15%. Capital gains tax is 10% which is paid when it is realized.

a) Calculate the initial cost of investment.

b) Calculate the present value of after-tax cash operating income.

c) Calculate the present value of tax savings from depreciation.

d) Calculate the present value of after-tax salvage value.

e) Based on the net present value method, should the project be undertaken?