Suppose GM gets in financial trouble again and tries to sell off assets it believes are not central to its core business. One of the assets it wishes to sell is all of the technology (knowledge, results from research, intellectual capital, etc) required to produce a solar/gasoline hybrid vehicle that can get 80 miles to the gallon. GM has spend over $150 million developing this technology, but it is desperate to raise cash and is willing to sell it to Ford at a fire sale price of $80 million. You are an executive at Ford, and you are considering whether or not to purchase this technology.

If you purchase the technology and you decide to start manufacturing solar/gasoline hybrid cars, you will require an up front investment in plant and equipment of $300 million. You will be able to produce and sell your first car one year after you make the investment. Your best forecast suggests that if you decide to build the plant immediately, revenues will be $240 million per year for ten years. The project does not require immediate net working capital. Afterwards, you expect your accounts receivables to be approximately 12% of revenues every year, starting in year 1. You expect accounts payable to be 5% of COGS (costs of good sold), also every year, staring in year 1. Your gross profit margin will be 30% (i.e. COGS is 70% of the revenues), and you expect overhead costs to be $2 million per year. Finally, you plan on using the plant and equipment for 10 years, and you expect to sell it for scrap for $120 million. Depreciation charges are not included in either the gross margin or overhead forecasts stated above. Your tax rate is 38%.

a. Use the following table to compute the Free Cash Flows of the investment in the technology and plant, assuming you purchase the technology and invest in the plant and equipment immediately and shut it down in year 10