Today is 20th April, 2020. You are a senior financial analyst with ADP in their capital budgeting division. ADP is considering expanding in Australia due to its positive business atmosphere and cultural similarities to the U.S. The new facility would require a one-off initial investment in fixed assets of $1.5 billion in Australian and additional capital investment of 4% of revenue each year in year 1-4. All capital investments would be depreciated straight-line over five years following the investment. Assume that at the end of the project the sales price of equipment is AUD 100 million. Revenues from the facility are expected to be $2 billion AUD in year 1 and grow at 10% per year thereafter. The cost of goods sold (COGS) would be 30% of revenue; the other operating expenses (excluding the Depreciation and Amortisation expenses (D&A)) would amount to 11% of revenue. Net working capital requirements would be 10% of sales and would be required the year prior to the actual revenues. All net working capital would be recovered at the end of the fifth year. Assume that the tax rates are the same in the two countries, and that two markets are internationally integrated, and that the cash flow uncertainty of the project is un-correlated with changes in the exchange rate (hint: you can use the home currency approach to value the Australian business; the home currency is USD). You manager wants you to find the NPV of the project in U.S. dollars using a USD cost of capital of 8%. You have the following market data: Spot exchange rate: USD0.6336/AUD or 1 AUD=0.6336 USD (as of 20th April 2020, Bloomberg) Yield-to-maturity (YTM) of zero-coupon government bonds (as of 20th April, 2020, 1-year 2-year 3-year 4-year 5-year (Annual rates % p.a.) U.S. yield-curve 0.15 0.20 0.26 0.31 0.35 Australian yield-curve 0.23 0.24 0.24 0.29 0.38 Assume that ADP's marginal corporate tax rate is 28%. Requirements: (1) In your Excel spreadsheet, create a projection with timeline (from year 0 to 5). Project free cash flows from this project (without considering any financing effects) from year 0 to year 5 in Australian $ (million). Assume that amortisation is zero in all years and that all cash flows occur at the year end. Provide your projection as Appendix 2(1). You should use the template provided on Canvas (Worksheet Q2 of AssignmentTwo_Data.xlsx). (25 marks) (2) Compute the synthetic forward rates for each of the five years of the project (F0,1 (1+r)? (1+r*)7 x So). Then, use the forward rates to convert the cash flows to U.S. dollars. Provide your worksheet in Appendix 2(2). (10 marks) (3) Compute the NPV of the project in U.S. dollars using the 8% required return given by your manager. Include your DCF in Appendix 2(3). (5 marks) 0 3 4 Appendix 2(1) Year Assumptions Revenue growth COGS as % of revenue Other exp. % of revenue Tax rate CAPEX as % of revenue NWC as % of revenue Income statement items Revenue (A$ m) COGS Other exp. D&A EBIT 0 2 3 4 Year Free cash flow to firm (A$ million) (1) Cash flow from operations = EBIT*(1-1)+D&A (2) CAPEX NWC (3) Chg. in NWC (4) Net cash flow from sales of assets Page 1 FCFF=(1)-(2)-(3)+(4) Calculation area Fixe Asset BASE B A S E 0 2 3 4 5 Appendix 2(2) Year Convert A$ cash flows to US$ cash flows r (US$) r (A$) Spot ( USD per A$) Synthetic forward rate (USD per A$) FCFF (US$ million) 0.15% 0.23% 0.20% 1% 0.26% 0.24% 0.31% 0.29% 0.35% 0.38% 0.6336 0 1 2 3 4 5 Appendix 2(2) Year Convert A$ cash flows to US$ cash flows r(US$) r* (A$) Spot ( USD per A$) Synthetic forward rate (USD per A$) FCFF (US$ million) 0.15% 0.23% 0.20% 0.24% 0.26% 0.24% 0.31% 0.29% 0.35% 0.38% 0.6336 0 1 2 3 4 5 Appendix 2(3) Year DCF FCFF (US$ million) Discount rate (US$) Discount factor PV NPV (US$ million) Today is 20th April, 2020. You are a senior financial analyst with ADP in their capital budgeting division. ADP is considering expanding in Australia due to its positive business atmosphere and cultural similarities to the U.S. The new facility would require a one-off initial investment in fixed assets of $1.5 billion in Australian and additional capital investment of 4% of revenue each year in year 1-4. All capital investments would be depreciated straight-line over five years following the investment. Assume that at the end of the project the sales price of equipment is AUD 100 million. Revenues from the facility are expected to be $2 billion AUD in year 1 and grow at 10% per year thereafter. The cost of goods sold (COGS) would be 30% of revenue; the other operating expenses (excluding the Depreciation and Amortisation expenses (D&A)) would amount to 11% of revenue. Net working capital requirements would be 10% of sales and would be required the year prior to the actual revenues. All net working capital would be recovered at the end of the fifth year. Assume that the tax rates are the same in the two countries, and that two markets are internationally integrated, and that the cash flow uncertainty of the project is un-correlated with changes in the exchange rate (hint: you can use the home currency approach to value the Australian business; the home currency is USD). You manager wants you to find the NPV of the project in U.S. dollars using a USD cost of capital of 8%. You have the following market data: Spot exchange rate: USD0.6336/AUD or 1 AUD=0.6336 USD (as of 20th April 2020, Bloomberg) Yield-to-maturity (YTM) of zero-coupon government bonds (as of 20th April, 2020, 1-year 2-year 3-year 4-year 5-year (Annual rates % p.a.) U.S. yield-curve 0.15 0.20 0.26 0.31 0.35 Australian yield-curve 0.23 0.24 0.24 0.29 0.38 Assume that ADP's marginal corporate tax rate is 28%. Requirements: (1) In your Excel spreadsheet, create a projection with timeline (from year 0 to 5). Project free cash flows from this project (without considering any financing effects) from year 0 to year 5 in Australian $ (million). Assume that amortisation is zero in all years and that all cash flows occur at the year end. Provide your projection as Appendix 2(1). You should use the template provided on Canvas (Worksheet Q2 of AssignmentTwo_Data.xlsx). (25 marks) (2) Compute the synthetic forward rates for each of the five years of the project (F0,1 (1+r)? (1+r*)7 x So). Then, use the forward rates to convert the cash flows to U.S. dollars. Provide your worksheet in Appendix 2(2). (10 marks) (3) Compute the NPV of the project in U.S. dollars using the 8% required return given by your manager. Include your DCF in Appendix 2(3). (5 marks) 0 3 4 Appendix 2(1) Year Assumptions Revenue growth COGS as % of revenue Other exp. % of revenue Tax rate CAPEX as % of revenue NWC as % of revenue Income statement items Revenue (A$ m) COGS Other exp. D&A EBIT 0 2 3 4 Year Free cash flow to firm (A$ million) (1) Cash flow from operations = EBIT*(1-1)+D&A (2) CAPEX NWC (3) Chg. in NWC (4) Net cash flow from sales of assets Page 1 FCFF=(1)-(2)-(3)+(4) Calculation area Fixe Asset BASE B A S E 0 2 3 4 5 Appendix 2(2) Year Convert A$ cash flows to US$ cash flows r (US$) r (A$) Spot ( USD per A$) Synthetic forward rate (USD per A$) FCFF (US$ million) 0.15% 0.23% 0.20% 1% 0.26% 0.24% 0.31% 0.29% 0.35% 0.38% 0.6336 0 1 2 3 4 5 Appendix 2(2) Year Convert A$ cash flows to US$ cash flows r(US$) r* (A$) Spot ( USD per A$) Synthetic forward rate (USD per A$) FCFF (US$ million) 0.15% 0.23% 0.20% 0.24% 0.26% 0.24% 0.31% 0.29% 0.35% 0.38% 0.6336 0 1 2 3 4 5 Appendix 2(3) Year DCF FCFF (US$ million) Discount rate (US$) Discount factor PV NPV (US$ million)