please help with questions 1 - 6. please see project 4 attachments. Thanks

C E G H K Details of McCormick Plant Proposal As you know from Project 4, McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the 7 10 company's land, which has a current, after-tax market value of $14 million. 11 12 You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow 13 impact of working capital on the capital budget evaluation. 14 The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the Tight. 15 Year The company will need to finance some of the cash to fund $17 million in receivables and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts 16 17 Payable). Add the net cash outflow for working capital to the cash outflow for the plant, equipment and land in year zero. The $17 million for receivables and the $14 million for Inventory are cash outflows. The $15 million for 18 19 receivables is a cash inflow. 20 21 Assume that this net working capital is recovered as a cash inflow in year 21. 22 23 The company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. 24 C 1C 25 11 26 Questions: 27 12 27 1. What will be the tax depreciation each year? Note: the total deprecation of tax purposes will still be $350 29 million if your calculations are correct. 13 28 14 15 30 2. Create an after-tax cash flow timeline similar to the one you did in Project 4. 16 31 17 32 3. Calculate the new NPV and IRR. Should the Project be accepted? The CFO thinks that the likely NPV and IRR 18 33 will be close to the numbers that you calculated in Project 4. NPV = ($349,999,992.34) No the project should not 19 34 be accepted 20 35 36 The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow. 37 I 4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, "What would happen to the NPV calculation if the cash tax expenses come in 2 % higher than estimated and the tax rate increases to 50 % in year 4?" This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate . Use Table 3 Cash fro Revenue $Million Year 38 1 39 40 5. What would be the net present value, NPV in this "worst case" cash flow? What will be the IRR? 41 42 6. Should the project be accepted? Discuss the risk and the reward to McCormick. 43 6 44 7 45 $ 46 $ 9 47 Table 1 MACRS $350 Depreciation Depreciation $50.02 7 Year class Year 14.29% 1 $85.72 24.49% 2 $61.22 17.49% 7 3 $43.72 12.49% 4 $31.26 8.93% $31.22 $31.26 8.92% 10 6 8.93% 11 7 $15.61 4.46% 12 3 Table 2 F E D C 14 A Cash outflow expenses in SMillions $1,800 Cash from After tax Cash Flow In SMillions Taxable Income Tax in SMillions Depreciation in Revenue in in $ Millions 27.5% rate $Millions $Millions 15 Year $65.95 $78.67 $6.05 $21.99 $1,728 $50.02 $85.72 1 $9.72 -$2.67 $1,824 $1,920 $1,900 2 $74.83 $5.17 $18.79 $40.29 $56.75 $61.22 $2,000 $2,100 $2,200 $2,300 $2,400 3 $72.92 $11.08 $2,016 $43.72 4 $72.40 $15.60 $2,112 $2,208 $31.26 20 $75.29 $16.71 $60.78 $31.22 6 21 $64.75 $78.20 $17.80 $2,304 $31.26 22 23 7 $76.79 $23 21 S84 39 $15.61 $2.400 $2.500 8 Capital Budgeting Instructions Cost of Capital Type here to search 29 P R $2,500 $2,600 $2,700 $2,600 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $800 $400 $2,400 $2,496 $2,592 $2,496 $2,400 $2,304 $2,112 $1,920 $1,728 $1,440 $1,152 $15.61 $84.39 $104.00 $108.00 W $23.21 $76.79 9 $28.60 $75.40 $78.30 $75.40 $72.50 $69.60 $63.80 $58.00 $52.20 10 $29.70 11 $104.00 $100.00 $96.00 $28.60 $27.50 12 13 $26.40 14 $88.00 $24.20 15 $80.00 $22.00 16 $72.00 $60.00 $19.80 $16.50 $13.20 $8.80 $4.40 17 $43.50 18 $48.00 $34.80 $23.20 19 $768 $32.00 20 $384 $16.00 $27.60 Table 3 B A C D E F Tax in SMillions 27.5 % rate in Taxable Income years 1, 2, 3 and Cash from Cash outflow, Depreciation in SMillions Revenue in SMillions $1,800 $1,900 $2,000 $2,100 $2,200 $2.300 Instructions expenses in SMillions After tax Cash Flow In in $ Millions 50% there after SMillions Year $1,762.56 $1,860.48 $1,958.40 $50.02 $85.72 $61.22 -$12.57 -$3.46 $40.90 1 $46.20 $12.70 $52.22 2 $5.40 $19.62 $47.00 $43.70 $0.02 $2,056.32 $2,154.24 S0.04 $43.72 4 $7.25 $38.51 $39.53 $14.50 S31.26 5 $16.62 $8.31 $2.252.16 S31.22 61 Cost of Capital Capital Budgeting e Tyne here to search S Q R $2,300 $2,400 $2,500 $2,600 $2,700 $2,600 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $2,252.16 $2,350.08 $2,448.00 $2,545.92 $2,643.84 $2,545.92 $2,448.00 $2,350.08 $2,154.24 $1,958.40 $1,762.56 $1,468.80 $31.22 $31.26 $39.53 $40.59 $33.80 $27.04 6 $16.62 $8.31 $18.67 7 $9.33 $18.20 $27.04 $28.08 $15.61 $36.39 $0.00 $0.00 $0.00 $54.08 10 $56.16 $28.08 $54.08 $52.00 $49.92 $45.76 $41.60 $37.44 $31.20 $27.04 $26.00 $24.96 $22.88 $20.80 11 $27.04 $26.00 12 13 $24.96 14 $22.88 $20.80 15 $18.72 $15.60 16 $18.72 $15.60 17 $1,175.04 $783.36 $24.96 $12.48 $12.48 18 $8.32 $800 $16.64 $8.32 19 $400 $4.16 $8.32 $391.68 $4.16 20 E G K McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made a full offer of $3,000,000.00 for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00. 2 4 5 6 7 Now, the landowner must make a decision between the two competing offers. To make this decision, James should first identify the 8 Future Value (FV) of each offer. James's bank is offering a 12 percent interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to the right. 1 10 1. What is the Future Value (FV) of each offer? FV-13,740,272 What is the two competing offers? Unknown manufacturing 12 company makes an for $3,000,000.00 and McCormick & Company makes an offer $4,424,000.00. 11 I 13 2. Based on your Future Value calculations, which offer should James accept? James should accept the offer from McCormick and 14 Company. 15 Principa 16 McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow 70 percent Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to 18 17 purchase the land. This means McCormick & Company will need to make a 30 percent down payment to secure the commercial 19 acquisition and development loan. McCormick & Company is considering three different loan options: 4 Loan Loan A Loan B 20 Loan C 21 Loan A: 20-year loan with a fixed annual interest rate of 6 percent 22 Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent 23 5 Loan Loan C: 15-year loan with a fixed annual interest rate of 5 percent Loan A Loan B 24 3. How much of the total $4,424,000.00 offer will be financed? 3,096,800 25 lloan C 26 Annuities Corporate Valuation Financing and Investing Instructions LO fate of 5 percent 24 3. How much of the total $4,424,000.00 offer will be financed? 25 3,096,800 26 4. Which loan will have the lowest monthly payment? Loan A 27 I 28 5. Which loan will have the lowest total payback amount? Loan B $3,913,699.35 29 30 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? 31 32 Irecommend McCormick select the loan with the lowest total payback amount should be accepted as overall, it will have the lowest 33 34 35 36 37 38 39 Financing and Investing Instructions Corporate Valuation Annuities Type here to search e L 29 PV PMT FV 1 ($13,740,272.47) $4,424,000 10 12% 10 11 IN 12% $4,424,000.00 PV PMT FV 12 ($13,740,272.47) 10 13 14 Principal Percent Down Amount Financed 3 15 30% $3,096,800.00 16 17 I/N 6% $3,096,800.00 4.5%| $3,096,800.00 5% $3,096,800.00 PV PMT 18 4 Loan ($269,993.14) Loan A 20 19 ($391,369.94) Loan B 20 10 Loan C ($298,352.80) 15 21 22 IN Total Paid PV PMT 23 5 Loan $3,096,800 $3,096,800 $3,096,800 $269,993.14 $391,369.94 $298,352.80 $5,400,000.00 $3,913,699.35 $4,475,291.94 Loan A 20 6% 24 Loan B 10 4.5% 25 Loan C 5% 26 15 27 28 6 Loan B 29 30 31 Financing and Investing Corporate Valuation Annuities Instructions R W X Bx (RM R RF 1 + Rp) risk free rate 2.03 Expected return = 5.63 Beta 0.6 expected market return risk free rate 8.03 2.03 2 Rs expected dividend current stock price= constant growth rate 2.28 cost of equity 0.101644 155.7 or 10.16% 0.087 Annuities ancing and Investing Corporate Valuation + 100% 11:49 PM Co 99% 12/1/2019 PP C E G H K Details of McCormick Plant Proposal As you know from Project 4, McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the 7 10 company's land, which has a current, after-tax market value of $14 million. 11 12 You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow 13 impact of working capital on the capital budget evaluation. 14 The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the Tight. 15 Year The company will need to finance some of the cash to fund $17 million in receivables and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts 16 17 Payable). Add the net cash outflow for working capital to the cash outflow for the plant, equipment and land in year zero. The $17 million for receivables and the $14 million for Inventory are cash outflows. The $15 million for 18 19 receivables is a cash inflow. 20 21 Assume that this net working capital is recovered as a cash inflow in year 21. 22 23 The company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. 24 C 1C 25 11 26 Questions: 27 12 27 1. What will be the tax depreciation each year? Note: the total deprecation of tax purposes will still be $350 29 million if your calculations are correct. 13 28 14 15 30 2. Create an after-tax cash flow timeline similar to the one you did in Project 4. 16 31 17 32 3. Calculate the new NPV and IRR. Should the Project be accepted? The CFO thinks that the likely NPV and IRR 18 33 will be close to the numbers that you calculated in Project 4. NPV = ($349,999,992.34) No the project should not 19 34 be accepted 20 35 36 The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow. 37 I 4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, "What would happen to the NPV calculation if the cash tax expenses come in 2 % higher than estimated and the tax rate increases to 50 % in year 4?" This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate . Use Table 3 Cash fro Revenue $Million Year 38 1 39 40 5. What would be the net present value, NPV in this "worst case" cash flow? What will be the IRR? 41 42 6. Should the project be accepted? Discuss the risk and the reward to McCormick. 43 6 44 7 45 $ 46 $ 9 47 Table 1 MACRS $350 Depreciation Depreciation $50.02 7 Year class Year 14.29% 1 $85.72 24.49% 2 $61.22 17.49% 7 3 $43.72 12.49% 4 $31.26 8.93% $31.22 $31.26 8.92% 10 6 8.93% 11 7 $15.61 4.46% 12 3 Table 2 F E D C 14 A Cash outflow expenses in SMillions $1,800 Cash from After tax Cash Flow In SMillions Taxable Income Tax in SMillions Depreciation in Revenue in in $ Millions 27.5% rate $Millions $Millions 15 Year $65.95 $78.67 $6.05 $21.99 $1,728 $50.02 $85.72 1 $9.72 -$2.67 $1,824 $1,920 $1,900 2 $74.83 $5.17 $18.79 $40.29 $56.75 $61.22 $2,000 $2,100 $2,200 $2,300 $2,400 3 $72.92 $11.08 $2,016 $43.72 4 $72.40 $15.60 $2,112 $2,208 $31.26 20 $75.29 $16.71 $60.78 $31.22 6 21 $64.75 $78.20 $17.80 $2,304 $31.26 22 23 7 $76.79 $23 21 S84 39 $15.61 $2.400 $2.500 8 Capital Budgeting Instructions Cost of Capital Type here to search 29 P R $2,500 $2,600 $2,700 $2,600 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $800 $400 $2,400 $2,496 $2,592 $2,496 $2,400 $2,304 $2,112 $1,920 $1,728 $1,440 $1,152 $15.61 $84.39 $104.00 $108.00 W $23.21 $76.79 9 $28.60 $75.40 $78.30 $75.40 $72.50 $69.60 $63.80 $58.00 $52.20 10 $29.70 11 $104.00 $100.00 $96.00 $28.60 $27.50 12 13 $26.40 14 $88.00 $24.20 15 $80.00 $22.00 16 $72.00 $60.00 $19.80 $16.50 $13.20 $8.80 $4.40 17 $43.50 18 $48.00 $34.80 $23.20 19 $768 $32.00 20 $384 $16.00 $27.60 Table 3 B A C D E F Tax in SMillions 27.5 % rate in Taxable Income years 1, 2, 3 and Cash from Cash outflow, Depreciation in SMillions Revenue in SMillions $1,800 $1,900 $2,000 $2,100 $2,200 $2.300 Instructions expenses in SMillions After tax Cash Flow In in $ Millions 50% there after SMillions Year $1,762.56 $1,860.48 $1,958.40 $50.02 $85.72 $61.22 -$12.57 -$3.46 $40.90 1 $46.20 $12.70 $52.22 2 $5.40 $19.62 $47.00 $43.70 $0.02 $2,056.32 $2,154.24 S0.04 $43.72 4 $7.25 $38.51 $39.53 $14.50 S31.26 5 $16.62 $8.31 $2.252.16 S31.22 61 Cost of Capital Capital Budgeting e Tyne here to search S Q R $2,300 $2,400 $2,500 $2,600 $2,700 $2,600 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $2,252.16 $2,350.08 $2,448.00 $2,545.92 $2,643.84 $2,545.92 $2,448.00 $2,350.08 $2,154.24 $1,958.40 $1,762.56 $1,468.80 $31.22 $31.26 $39.53 $40.59 $33.80 $27.04 6 $16.62 $8.31 $18.67 7 $9.33 $18.20 $27.04 $28.08 $15.61 $36.39 $0.00 $0.00 $0.00 $54.08 10 $56.16 $28.08 $54.08 $52.00 $49.92 $45.76 $41.60 $37.44 $31.20 $27.04 $26.00 $24.96 $22.88 $20.80 11 $27.04 $26.00 12 13 $24.96 14 $22.88 $20.80 15 $18.72 $15.60 16 $18.72 $15.60 17 $1,175.04 $783.36 $24.96 $12.48 $12.48 18 $8.32 $800 $16.64 $8.32 19 $400 $4.16 $8.32 $391.68 $4.16 20 E G K McCormick & Company is considering building a new factory in Largo, Maryland. James Francis, a landowner, is selling a 4.35-acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made a full offer of $3,000,000.00 for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00. 2 4 5 6 7 Now, the landowner must make a decision between the two competing offers. To make this decision, James should first identify the 8 Future Value (FV) of each offer. James's bank is offering a 12 percent interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to the right. 1 10 1. What is the Future Value (FV) of each offer? FV-13,740,272 What is the two competing offers? Unknown manufacturing 12 company makes an for $3,000,000.00 and McCormick & Company makes an offer $4,424,000.00. 11 I 13 2. Based on your Future Value calculations, which offer should James accept? James should accept the offer from McCormick and 14 Company. 15 Principa 16 McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow 70 percent Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to 18 17 purchase the land. This means McCormick & Company will need to make a 30 percent down payment to secure the commercial 19 acquisition and development loan. McCormick & Company is considering three different loan options: 4 Loan Loan A Loan B 20 Loan C 21 Loan A: 20-year loan with a fixed annual interest rate of 6 percent 22 Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent 23 5 Loan Loan C: 15-year loan with a fixed annual interest rate of 5 percent Loan A Loan B 24 3. How much of the total $4,424,000.00 offer will be financed? 3,096,800 25 lloan C 26 Annuities Corporate Valuation Financing and Investing Instructions LO fate of 5 percent 24 3. How much of the total $4,424,000.00 offer will be financed? 25 3,096,800 26 4. Which loan will have the lowest monthly payment? Loan A 27 I 28 5. Which loan will have the lowest total payback amount? Loan B $3,913,699.35 29 30 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? 31 32 Irecommend McCormick select the loan with the lowest total payback amount should be accepted as overall, it will have the lowest 33 34 35 36 37 38 39 Financing and Investing Instructions Corporate Valuation Annuities Type here to search e L 29 PV PMT FV 1 ($13,740,272.47) $4,424,000 10 12% 10 11 IN 12% $4,424,000.00 PV PMT FV 12 ($13,740,272.47) 10 13 14 Principal Percent Down Amount Financed 3 15 30% $3,096,800.00 16 17 I/N 6% $3,096,800.00 4.5%| $3,096,800.00 5% $3,096,800.00 PV PMT 18 4 Loan ($269,993.14) Loan A 20 19 ($391,369.94) Loan B 20 10 Loan C ($298,352.80) 15 21 22 IN Total Paid PV PMT 23 5 Loan $3,096,800 $3,096,800 $3,096,800 $269,993.14 $391,369.94 $298,352.80 $5,400,000.00 $3,913,699.35 $4,475,291.94 Loan A 20 6% 24 Loan B 10 4.5% 25 Loan C 5% 26 15 27 28 6 Loan B 29 30 31 Financing and Investing Corporate Valuation Annuities Instructions R W X Bx (RM R RF 1 + Rp) risk free rate 2.03 Expected return = 5.63 Beta 0.6 expected market return risk free rate 8.03 2.03 2 Rs expected dividend current stock price= constant growth rate 2.28 cost of equity 0.101644 155.7 or 10.16% 0.087 Annuities ancing and Investing Corporate Valuation + 100% 11:49 PM Co 99% 12/1/2019 PP