Question 1 

Suppose the following information is available for an automotive part company to estimate the firm's earnings for the next 10 years. 

To build its new production line, the company is required to make a one-off investment of $44 million.  It has a useful life of 10 years and a salvage value of $2 million at the end.

The estimated demand for the company's product is 10,000 units per year.

The sales price of the product will be $5,000 per unit.

The production requires 60hours of labor per unit, and the estimated labor cost is $30 per hour.  It also requires various parts and supplies that will cost $1,600 per unit.

The firm expects additional operating expenses to be incurred.  These are estimated to be $2 million per year.

Answer questions (a) and (b) below.

 

1. Calculate (i)depreciation expense per year(assume the remaining book value of existing assets is $0).  Additionally, determine (ii) the production cost (i.e., cost of goods sold) per year.   
   Do NOT present your results by multiplying annual figures by 10 years.

Answer (show the steps/calculation toward your results): 

 

1. Determine EBIT per year.  Do NOT present your result by multiplying annual figures by 10 years.

Answer (show the steps/calculation toward your results): 

 

Question 2   

Sport Science International is considering launching a new sports drink Warrior-Ade. The estimated project life is three yearsdue to the fierce competition in the sports drink market.  The project requires an upfront investment of $450,000, which will depreciate over three years on a straight-line basis with no salvage value. Additionally, the following information has been estimated: 

The estimated annual demand for the new sports drink is 300,000 bottles, 200,000 bottles, and 150,000 bottles, respectively, for the three years of the product life.

The unit price of the new sports drink is $2.0 per bottle.

The cost of inputs (water and additives) is $1.04 per bottle.

The company will need to maintain working capital to support production and sales. The working capital requirementsare $0, $50,000, and $100,000, respectively, at the beginning of year 1, at the end of year 1, and at the end of year 2.  All remaining working capital balance will then be recovered at the end of year 3.

The company faces a tax rate of 30% and generates taxable income of at least $6,000 each year from other divisions.

Answer questions (a) and (b) below.                    

 

Calculate (i) changes in working capital requirements for each year.  Additionally, find (ii) depreciation expense per year.

Answer (show the steps/calculation toward your results): 

 

Determine EBIT, net income, and cash flows and find the NPV of the project assuming the project'scost of capital is 10%.

Answer (complete the cash flow worksheet below and provide the NPV): 

Cash flow worksheet: 

Year	0	1	2	3
Sales	n/a
-CoGS
-Depreciation
EBIT
-Tax (T = 30%)
Net income	n/a
Depreciation add-back
Capex
Working capital change
Cash flows

 

Question 3   

Suppose you have the estimates of the CAPM betafor the equity shares of the followingfirms: 

• Levi Strauss & Co. (NYSE: LEVI)          :           = 1.10     
• Tesla Inc. (Nasdaq: TSLA)                               :           = 1.90     

Assume the risk-free rate is estimated at 4% and has been stable over the entire CAPM estimation period and will remain so in the foreseeable future as well.     

Answer questions (a) and (b) below.        

1. Suppose the expected return on S&P 500 index, a proxy for the market portfolio, is estimated at 14%.  Find the CAPM required return on equity shares of Levi's and Tesla, respectively.

1. Suppose the market risk premium is estimated at 12%. Find the CAPM required return onequity shares of Levi's and Tesla, respectively.

Answer (show the steps/calculation toward your results):