Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Your firm is considering a new project of manufacturing healthy chocolate bars, the details of information are given below: A new machine costing $5 million

Your firm is considering a new project of manufacturing healthy chocolate bars, the details of information are given below:
A new machine costing $5 million is required (at t=0). In addition, the company needs to invest $10 million to build a new manufacturing plant (at t=0).
The project requires an initial investment (at t=0) into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following years, and can be fully recovered at the end of the project (end of year 4).
The machine is being depreciated to zero for tax purposes using the 5-year straight-line method. The machine can be sold at the end of the project (end of year 4) for $800,000.
The plant is being depreciated to zero for tax purposes using the 20-year straight- line method. The plant can be sold at the end of the project (end of year 4) for $8.5 million.
Sales of chocolate bars are expected to be $50 million per year for the next four years. The company expects total manufacturing costs to be 40% of sales each year, and the employee annual costs (salary and related costs) for this project to be $10 million. In addition, the annual advertising costs of the company will increase from
$9.6 million to $16 million.
The corporate tax rate is 35%.
The company has a target debt-equity ratio of 0.5, its cost of equity is 15%, and its cost of debt is 8%.
(1) What is the after-tax salvage value of plant and machine, respectively?
(2) Estimate the annual free cash flow from this project.
(3) This new project is somewhat riskier than a typical project for the company. Management uses the subjective approach and applies an adjustment factor of +2% to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating the new project.
(4) Estimate the NPV of this project.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Economic Development Finance

Authors: Karl F Seidman

1st Edition

0761927093, 9780761927099

More Books

Students also viewed these Accounting questions

Question

Define distressed debt.

Answered: 1 week ago