Question
Your firm is considering building a$590 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of$140million per year for the next ten years.
Your firm is considering building a$590 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of$140million per year for the next ten years. The plant will be depreciated on a straight-line basis over ten years (assuming no salvage value for tax purposes). After ten years, the plant will have a salvage value of$293million (which, since it will be fully depreciated, is then taxable). The project requires$50million in working capital at the start, which will be recovered in year ten when the project shuts down. The corporate tax rate is35%.All cash flows occur at the end of the year.
a. If the risk-free rate is4.4%,the expected return of the market is11.6%,and the asset beta for the consumer electronics industry is1.66,what is the NPV of the project?
b. Suppose that you can finance$472million of the cost of the plant using ten-year,9.1%coupon bonds sold at par. This amount is incremental new debt associated specifically with this project and will not alter other aspects of the firm's capital structure. What is the value of the project, including the tax shield of the debt?
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