3) You are valuing a four year project. The initial capital expenditure (capex) is $125 million. You have a risk free agreement to sell the PP&E four years from now for $80 million. The relevant corporate tax rate is 30%, the cost of equity capital is 25%, and the WACC is 17%. Assume that net operating working capital needs are 30% of revenue and that you recoup your NOWC three months after you sell the equipment. Assume that we recognize operating cash flows in the middle of the year. The risk free rate is 4.5%. Based on the projections below, what is value of this project? (in $ millions) Revenue COGS Gross Margin SG&A EBITDA Depreciation EBIT Interest Expense EBT Taxes Net Income Additional Capex Year 1 60.0 (10.0) 50.0 (25.0) 25.0 (10.0) 15.0 (5.0) 10.0 (3.0) 7.0 20 Year 2 110.0 150.0 (25.0) (38.0) 85.0 112.0 (40.0) 45.0 (10.0) 35.0 (5.0) 30.0 (9.0) 21.0 Year 3 15 (55.0) 57.0 (10.0) 47.0 (5.0) 42.0 Year 4 0 120.0 (30.0) 90.0 (40.0) 50.0 (10.0) 40.0 (5.0) 35.0 (12.6) (10.5) 29.4 24.5 0 (in $ millions) a) b) c) d) -4.068 5.995 3.324 -22.057

3) You are valuing a four year project. The initial capital expenditure (capex) is $125 million. You have a risk free agreement to sell the PP&E four years from now for $80 million. The relevant corporate tax rate is 30%, the cost of equity capital is 25%, and the WACC is 17%. Assume that net operating working capital needs are 30% of revenue and that you recoup your NOWC three months after you sell the equipment. Assume that we recognize operating cash flows in the middle of the year. The risk free rate is 4.5%. Based on the projections below, what is value of this project? (in $ millions) Revenue COGS Gross Margin SG&A EBITDA Depreciation EBIT Interest Expense EBT Taxes Net Income Additional Capex Year 1 60.0 (10.0) 50.0 (25.0) 25.0 (10.0) 15.0 (5.0) 10.0 (3.0) 7.0 20 Year 2 110.0 150.0 (25.0) (38.0) 85.0 112.0 (40.0) 45.0 (10.0) 35.0 (5.0) 30.0 (9.0) 21.0 Year 3 15 (55.0) 57.0 (10.0) 47.0 (5.0) 42.0 Year 4 0 120.0 (30.0) 90.0 (40.0) 50.0 (10.0) 40.0 (5.0) 35.0 (12.6) (10.5) 29.4 24.5 0 (in $ millions) a) b) c) d) -4.068 5.995 3.324 -22.057

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter14: Real Options

Section: Chapter Questions

Problem 3MC: Tropical Sweets is considering a project that will cost $70 million and will generate expected cash...

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