please help with questions 3 and 4 Thanks

Table 2 and 3

Table 2 and 3

Table 1

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 company's land, which has a current, after-tax market value of $14 million. (note, a $350 million investment for a company with $10 billion in assets is significant but not huge. The $4 million investment in Project 4 is trivial and likely not requiring any high level approvals) You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the capital budget evaluation. (We jump right in to the most difficult tax depreciation. Your accountants can help in the real world) 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 right. 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 Payable). Add the net cash outflow for working capital to the cash outflow for the od land in waar zero The $17 million for receivables and 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 receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. The company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. The company now estimates that it can sell the land in year 21 for $40 million. It will also recover the cash spent on working capital in year 21. Use the WACC that you calculated in the Cost of Capital tab. (Q-6 of the Cost of Capital tab in Project 5) Questions L ention of toy 3. Should the Project be accepted? The CFO thinks that the likely NPV and IRR will be close to the numbers that you calculated in Project 4. ( this will be your first calculation of NPV and IRR. These two concepts are VERY important in Finance. You must use the NPV and IRR functions in Excel for this question.) The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow 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. 5. What would be the net nresent value in this worst case" cash flow? What 15 Year B00 VOUW Table 2 AB Cash from Cash outflow, Revenue in expenses in Depreciation in Taxable income Tax in $Millions After tax Cash Flow In $Millions $Millions $Millions in $ Millions 27.5% rate $Millions 1 $1,800 $1,728 $50.02 $21.99 $6.05 $65.95 2 $1,900 $1,824 $85.72 -$9.72 +-$2.67 $78.67 $2,000 $1,920 $61.22 $18.79 $5.17 $74.83 $2,100 $2,016 $43.72 $40.29 $11.08 $72.92 5 $2,200 $2,112 $31.26 $56.75 $15.60 $72.40 $2,300 $2,208 $31.22 $60.78 $16.71 $75.29 $2,400 $2,304 $31.26 $64.75 $17.80 $78.20 8 $2,500 $2,400 $15.61 $84.39 $23.21 $76.79 9 $2,600 $2,496 $104.00 $28.60 $75.40 10 $2,700 $2,592 $108.00 $29.70 $78.30 11 $2,600 $2,496 $104.00 $28.60 $75.40 12 $2,500 $2,400 $100.00 $27.50 $72.50 $2,400 $2,304 $96.00 $26.40 $69.60 cool cenon Instructions Cost of Capital Capital Budgeting 13 AA1 O Type here to search N $2,200 $2,112 $88.00 $24.20 $63.80 $2,000 $1,920 $80.00 $22.00 $58.00 $1,800 $1,728 $72.00 $19.80 $52.20 $1,500 $1,440 $60.00 $16.50 $43.50 $1,200 $1,152 $48.00 $13.20 $34.80 19 $800 $768 $32.00 $8.80 $23.20 $400 $384 $16.00 $4.40 $27.60 Table 3 - A B Tax in Millions Cash from Cash outflow, 27.5% rate in Revenue in expenses in Depreciation in Taxable income years 1, 2, 3 and After tax Cash Flow In $Millions $Millions Millions in $ Millions 50% there after Millions $1,800 $1,762.56 $50.02 -$12.57 -$3.46 $40.90 2 $1,900 $1,860.48 $85.72 -$46.20 -$12.70 $52.22 $2,000 $1,958.40 $61.22 -$19.62 -$5.40 $47.00 $2,100 $2,056.32 $43.72 -$0.04 -$0.02 $43.70 $2,200 $2,154.24 $31.26 $14.50 $7.25 $38.51 40 Instructions Cost of Capital Capital Budgeting Year + co 96% O Type here to search O $31.22 $31.26 $15.61 $0.00 $0.00 $0.00 10 11 12 M $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 $800 $400 2010 NOUNOU U N $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 $1,175.04 $783.36 $391.68 13 $16.62 $18.67 $36.39 $54.08 $56.16 $54.08 $52.00 $49.92 $45.76 $41.60 $37.44 $31.20 $24.96 $16.64 $8.32 $8.31 $9.33 $18.20 $27.04 $28.08 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 $39.53 $40.59 $33.80 $27.04 $28.08 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 19 20 + Instructions Cost of Capital Capital Budgeting 9 O Type here to search M Year WAWN Table 1 MACRS Depreciation 7 Year class 1 14.29% 24.49% 17.49% 12.49% 8.93% 6 8.92% 7 8.93% 4.46% $350 Depreciation $50.02 $85.72 $61.22 $43.72 $31.26 $31.22 $31.26 $15.61 Table 2 A Trach from Cash outflow, 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 company's land, which has a current, after-tax market value of $14 million. (note, a $350 million investment for a company with $10 billion in assets is significant but not huge. The $4 million investment in Project 4 is trivial and likely not requiring any high level approvals) You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the capital budget evaluation. (We jump right in to the most difficult tax depreciation. Your accountants can help in the real world) 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 right. 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 Payable). Add the net cash outflow for working capital to the cash outflow for the od land in waar zero The $17 million for receivables and 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 receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. The company still estimates revenues and expenses the same as it did in Project 4. See Table 2 at the right. The company now estimates that it can sell the land in year 21 for $40 million. It will also recover the cash spent on working capital in year 21. Use the WACC that you calculated in the Cost of Capital tab. (Q-6 of the Cost of Capital tab in Project 5) Questions L ention of toy 3. Should the Project be accepted? The CFO thinks that the likely NPV and IRR will be close to the numbers that you calculated in Project 4. ( this will be your first calculation of NPV and IRR. These two concepts are VERY important in Finance. You must use the NPV and IRR functions in Excel for this question.) The following questions will be used to estimate risk. Please use Table 3 to calculate cash flow 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. 5. What would be the net nresent value in this worst case" cash flow? What 15 Year B00 VOUW Table 2 AB Cash from Cash outflow, Revenue in expenses in Depreciation in Taxable income Tax in $Millions After tax Cash Flow In $Millions $Millions $Millions in $ Millions 27.5% rate $Millions 1 $1,800 $1,728 $50.02 $21.99 $6.05 $65.95 2 $1,900 $1,824 $85.72 -$9.72 +-$2.67 $78.67 $2,000 $1,920 $61.22 $18.79 $5.17 $74.83 $2,100 $2,016 $43.72 $40.29 $11.08 $72.92 5 $2,200 $2,112 $31.26 $56.75 $15.60 $72.40 $2,300 $2,208 $31.22 $60.78 $16.71 $75.29 $2,400 $2,304 $31.26 $64.75 $17.80 $78.20 8 $2,500 $2,400 $15.61 $84.39 $23.21 $76.79 9 $2,600 $2,496 $104.00 $28.60 $75.40 10 $2,700 $2,592 $108.00 $29.70 $78.30 11 $2,600 $2,496 $104.00 $28.60 $75.40 12 $2,500 $2,400 $100.00 $27.50 $72.50 $2,400 $2,304 $96.00 $26.40 $69.60 cool cenon Instructions Cost of Capital Capital Budgeting 13 AA1 O Type here to search N $2,200 $2,112 $88.00 $24.20 $63.80 $2,000 $1,920 $80.00 $22.00 $58.00 $1,800 $1,728 $72.00 $19.80 $52.20 $1,500 $1,440 $60.00 $16.50 $43.50 $1,200 $1,152 $48.00 $13.20 $34.80 19 $800 $768 $32.00 $8.80 $23.20 $400 $384 $16.00 $4.40 $27.60 Table 3 - A B Tax in Millions Cash from Cash outflow, 27.5% rate in Revenue in expenses in Depreciation in Taxable income years 1, 2, 3 and After tax Cash Flow In $Millions $Millions Millions in $ Millions 50% there after Millions $1,800 $1,762.56 $50.02 -$12.57 -$3.46 $40.90 2 $1,900 $1,860.48 $85.72 -$46.20 -$12.70 $52.22 $2,000 $1,958.40 $61.22 -$19.62 -$5.40 $47.00 $2,100 $2,056.32 $43.72 -$0.04 -$0.02 $43.70 $2,200 $2,154.24 $31.26 $14.50 $7.25 $38.51 40 Instructions Cost of Capital Capital Budgeting Year + co 96% O Type here to search O $31.22 $31.26 $15.61 $0.00 $0.00 $0.00 10 11 12 M $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 $800 $400 2010 NOUNOU U N $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 $1,175.04 $783.36 $391.68 13 $16.62 $18.67 $36.39 $54.08 $56.16 $54.08 $52.00 $49.92 $45.76 $41.60 $37.44 $31.20 $24.96 $16.64 $8.32 $8.31 $9.33 $18.20 $27.04 $28.08 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 $39.53 $40.59 $33.80 $27.04 $28.08 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 19 20 + Instructions Cost of Capital Capital Budgeting 9 O Type here to search M Year WAWN Table 1 MACRS Depreciation 7 Year class 1 14.29% 24.49% 17.49% 12.49% 8.93% 6 8.92% 7 8.93% 4.46% $350 Depreciation $50.02 $85.72 $61.22 $43.72 $31.26 $31.22 $31.26 $15.61 Table 2 A Trach from Cash outflow