Question $1$

$(20$ marks $)$

Kitchen expert Bhd is a specialty kitchen cabinet maker that produces cabinets to

order. It is a mature business that earned EBITDA of $$1\mathrm{.}5$ million on revenues of $$10$

million in the most recent year and is expected to continue to generate these figures in

perpetuity. The company is considering carrying some of its most popular models in

inventory, with an eye on increasing sales and operating profits. It has collected the

following information:

To carry inventory, the company will have to invest $$2\mathrm{.}5$ million in a storage facility,

which will be depreciated straight line over ten years down to a salvage value of

$$500,000.$

With the inventory, the company expects its annual revenues to increase to $$12\mathrm{.}5$

million and its overall EBITDA margin $($EBITDA as $\%$ of sales$)$ to increase to $20\%.$

For the next decade, the inventory will be maintained at $10\%$ of total revenues, with

the investment made at the start of each year. The inventory will be sold for book

value at the end of ten years.

The cost of capital for the company is $10\%$ and it faces a $40\%$ tax rate.

Required :

Estimate the NPV of the project $($carrying inventory$)$ assuming at ten$-$year life for the

investment.

$(10$ marks $)$

Estimate the breakeven EBITDA margin for the company, for the investment to have a zero

NPV$,$ if you now assume that the project lasts forever.

$(10$ marks $)$help