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Remark: all the dollar value below should be considered fair ( true ) market values i . e . any prospective buyer / seller would
Remark: all the dollar value below should be considered fair true market values ie any prospective buyerseller would gladly pay them
You were able to identify a potential project for your client, a very profitable producer of farming equipment. To compensate you for your valuation and ability to recognize a potentially profitable opportunity, your contract stipulates that if the project is undertaken, the company will pay you a one time tax deductible fee of $ at T
You estimated that units of a new equipment could be sold annually over the next years, at a price of $ each. Variable costs per unit are $ and fixed costs total $ million per year.
Startup costs include $ million to build production facilities to be paid in cash $ million for land to be paid in cash and $ million in initial net working capital NWC to be paid in cash.
NWC levels are expected to increase by $ throughout the life of the project that is every year, the NWC level is supposed to be $ higher than the previous years level
The $ million facility will be depreciated on a straightline basis to a value of zero over YEARS. note: even though the project takes only years, it is very well possible that the time of depreciation may be completely different from the maturity of the project.At the end of the projects life, the facilities including the land will have estimated value of $ million. The value of the land is not expected to change during the eight year period, and the land should not be depreciated.
The tax rate is and the required rate of return is
A If the company decides to undertake the project, what are the levels of free cash flows associated with every year of the projects in years through Hints: If you want to receive any credit, you have to present the full valuation of FCF all steps not just the final FCF numerical values. Tax on negative income is a POSITIVE CASH INFLOW because it allows shielding profits from other companys projects from taxation
B What is the NPV of the project?
C If IRR rule is applicable, then what is the IRR of the project?
D Ultimately, should the company undertake this project?
E Assume a little different scenario
Good news it turns out your company already OWNS the production facilities worth $ million and land worth million So these values will not have to be paid in cash.
How much will the NPV of the project change under these new circumstances? Should your client undertake the project in this case? Why or why not?
F Go back to the original project you analyzed in parts A through D Consider this scenario: If the client decides to start the production of farming equipment, the sales of the existing clients products will suffer. It can be estimated that the total FCF lost by the EXISTING products of the company would be $ per year for Years through if the new farming equipment is introduced.
How much will the NPV of the project change under these new circumstances? Should your client undertake the project in this case? Why or why not?
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