All American Pipeline

2427 Words Nov 15th, 2012 10 Pages
ALL-AMERICAN PIPELINE CASE WRITE-UP

EXECUTIVE SUMMARY
The business nature of the project—pipelines—affected many of our assumptions and approaches to our calculations for our ultimate decision. The case provided two sets of cost estimates from an outside consultant and from Goodyear after hiring a general contractor. We utilized both sets of costs that directed us to the same decision that Goodyear should not go ahead with the Pipeline Project.
Once we obtained the UFCF, the terminal value was calculated in three different ways, treating the pipeline as an asset on our books, finding the value of project if cash flows are received for perpetuity an finding the annuity value of cash flows for 30 years by assuming that after 1992 cash
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We made projections and calculations using estimates of Goodyear’s contractors as well as did a sensitivity test using the data of outside consultants, and the negative NPVs of both the projects showed that Goodyear should not go ahead with the project.

ASSUMPTIONS
Working Capital:
• In the CF statement given, no separate values for working capital accounts are given so the calculations are done assuming working capital to be 0.
Contingency:
• We disregarded contingency. We did not treat it as a cash component of working capital or as a capitalized expense because it was unclear in the case if the contingency was ever spent.
Growth:
• We assume that the revenues from pipelines grow at the rate of inflation which is 5%, after reaching capacity.
Tax credit:
• We assume that Goodyear benefits from tax credits from this project and therefore the benefit is added to the cash flows.
For calculating terminal value:
Using the Asset Method
• The Depreciable PPE calculated for North American Pipeline was sum of total cap ex in 1985 and 1986 excluding the land and right of way, contingency fund. 50% of Investment tax credit was not subtracted from the value of depreciable PPE because it does not affect the value of assets. This is unlike the calculation done for tax purpose, as shown in Exhibit 8.
• As mentioned in the case, PPE is depreciated on a straight line method for 30 years, for calculating the remaining asset worth.
• Value of land is added to the