Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Problem 1: Nestl Water Extraction Project (10 points) Nestl is considering scaling up its extraction of spring water from Ginnie Springs, Florida. Over the years,
Problem 1: Nestl Water Extraction Project (10 points) Nestl is considering scaling up its extraction of spring water from Ginnie Springs, Florida. Over the years, extraction (for bottled water) and environmental changes have depleted the aquifer at Ginnie Springs. State water managers forecast that if Nestl scales up its extraction to the full amount allowed under its permit that Ginnie Springs will run dry after four years. However, if Nestl scales down its extraction rate to a sustainable level, the spring will survive. You're tasked with helping Nestl evaluate two plans: Plan 1: scale up operations, which will only last four more years Plan 2: scale down operations, which will continue in perpetuity Under plan 1, operations will generate EBIT of \$242 million, \$205 million, \$126 million, and \$54 million in years one to four (respectively). Under plan 2, operations will generate EBIT of $32 million next year, growing at a rate of 1% over time. Suppose that under both plans there is no depreciation, capital expenditures, or changes to net working capital. Nestl's cost of equity is 6.8%, its cost of debt is 2.5%, and its debt-to-equity ratio is 25%. Nestl faces a marginal corporate tax rate of 21%. a. What is Nestl's WACC? (2 points) b. What is the NPV of the project under plan 1 ? ( 3 points) c. What is the NPV of the project under plan 2 ? (3 points) d. Based on its NPV, which plan would you recommend Nestl pursue? ( 2 points)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started