Part II.1 - Toyotas Hybrid Drive Systems

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 gas- electric hybrid drive systems in the U.S. To enable the expansion, they are contemplating investing $1.5 billion at the end of 2021 (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 (2022) 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 Toyotas corporate tax rate is 21%.

Question: In the sheet Toyota's cost of capital, estimate the projects unlevered free cash flows from Year 0 to Year 10 (or equivalently from Year 2021 to 2031, the end year of the project). **Please show excel formulas as well.**

B c D E F G H 1 1 K M N 0 P 1 Assumptions Capital Expenditure EBIT (Year 1) Depreciation (Year 1) Increase in Net Working Capital (Year 1) Increase in Net Working Capital Year O) Tax Rate USD million USD Million USD million USD million USD million FCF's Growth Rate Year 0 2021 1 2022 5% 2 2023 5% 3 2024 2% 4 2025 2% S 2026 2% 6 2027 2% 7 2028 2% 8 2029 2% 9 2030 2% 10 2031 EBIT Less: Taxes Unlevered Net Income Add: Depreciation Less: Capital Expenditures Less: Change in NWC FCF 5 Discount Rate Present Value of FCF NPV 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 15 2a risk free rate (10-year Treasury Yield) li equity beta i expected market risk premium cost of equityre 2b Moody's Rating debt beta cost of debt rD 2020 3a Cash and Short-Term Investments Debt in Current Liabilities Long-Term Debt-Total Net Debt USD million USD million USD million USD million 3b Stock Price Shares Outstanding Market Value of Equity 3c Enterprise Value USD millions The variable "SHARES - Outstanding at Fiscal Year End" reported in the WRDS is in the unit of millions USD million USD million 4 WACC