Question #

$2$

$-$

$$Project Valuation

Glentech Manufacturing is considering the purchase of an automated parts handler for the assembly and test area of its Phoenix, Arizona, plant.

The handler will cost $

$2$

$5$

$0$

$,$

$0$

$0$

$0$

$$to purchase plus $

$1$

$0$

$,$

$0$

$0$

$0$

$$for installation. If the company undertakes the investment, it will automate part of the semiconductor test area and reduce operating costs by $

$7$

$0$

$,$

$0$

$0$

$0$

$$per year for the next ten years. Five years into the life of the investment, however, Glentech will have to spend an additional $

$1$

$0$

$0$

$,$

$0$

$0$

$0$

$$to update and refurbish the handler. The investment in the handler will be depreciated using straight

$-$

line depreciation over ten years, and the refurbishing costs will be depreciated over the remaining five

$-$

year life of the handler

$($

also using straight

$-$

line depreciation

$)$

$.$

$$In ten years, the handler is expected to be worth $

$5$

$,$

$0$

$0$

$0$

$,$

$$although its book value will be zero. Glentech's tax rate is

$3$

$0$

$\%$

$,$

$$and its opportunity cost of capital is

$1$

$2$

$\%$

$.$

$$Exhibit P

$2$

$-$

$1$

$0$

$.$

$1$

$$contains cash flow calculations for the project that can be used in performing a DCF evaluation of its contribution to firm value. Answer each of the following questions concerning the project:

a

$)$

$$

$$

$$

Is this a good project for Glentech? Explain your answer.

b

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$$

$$

$$

What can you tell about the project from the NPV profile found in Exhibit P

$2$

$-$

$1$

$0$

$.$

$1$

$?$

c

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$$Add a driver for "Growth in reduction in operating costs"; this growth is a one time shift, for example, if we thought operating costs would decrease by $

$1$

$$each year and the user enters

$0$

$.$

$2$

$$for this driver, the decrease would be $

$1$

$.$

$2$

$$each and every year starting in year

$2$

$.$

$$Initially there is no change in savings but I want you to do a part c

$)$

$$where you evaluate the NPV and IRR of the cash flows with a

$3$

$.$

$5$

$\%$

$$growth starting in year

$2$

$.$

$$Note: this is a one

$-$

time shift in the estimated savings not something that compounds.

d

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$$Calculate the periodic discount factors a few rows below your cash flows.

$$A periodic discount factor for year t is

$1$

$/$

$($

$1$

$+$

r

$)$

$^$

t

$.$

$$Demonstrate how to use the discount factors to get the NPV

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you will get exactly the same answer as when you appropriately use the builtin Excel functions!

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