Project Parameters Initial Investment $ 235,000,000.00 $ 15,000,000.00 $ 250,000,000.00 $ (250,000,000.00) Equipment Cost Total Investment Investment Cost Salvage Value Opportunity Cost Externalities $ 38,000,000.00 Units Sold, Year 1 Annual Growth Ratw 900,000.00 9% Anhual Change in Units Sold, After Year 1 Sale Pricec per Unit, Yeear 1 Annual Change in Sale Price, After Year 1 Variable Cost (VC), Year 1 Inflation Rate Annual Change in VC, After Year 1 265.00 174.00 2.80% Nonvariable Cost (Non-VC), Year 1 Annual Change in Non-VC, After Year 1 Projected WACC Tax Rate NOWC (Net Operating Working Capital) Optiman Capital Structure 7% 21% 15% Equity 65% Debt Financing 35% Year 2 3 4 900,000.00 $ 1,509,390.10 $ 1,645,235.21 981,000.00 $ 272.42 $ Units 1,069,290.00$ 1,165,526.10 $ 1,270,423.45S 1,384,761.56S Selling $ 265.00 $ 280.05 $ 287.89 $ 295.95 $ 304.24 $ 312.76 $ 321.51 Sales $ 238,500,000.00 $ 267,244,020.00 $ 299,452,269.29 $ 335,542,256.79 $ 375,981,809.57 $ 421,295,137.26 $ 472,069,627.21 $ 528,963,458.68 Inflation 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% Variable $ 174.00 $ 178.87 $ 183.88 $ 189.03 $ 194.32 $ 199.76 $ 205.36 $ 211.11 MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% 35,725,000.00 $ 61,225,000.00 $ 43,725,000.00 $ 31,225,000.00 $ 22,325,000.00 $ 22,300,000.00 $ 22,325,000.00 $ 11,150,000.00 $ 202,774,826.00 $ 206,018,841.13 $ 255,727,085.41 $ 304,317,067.76 $ 353,656,615.25 $ 398,994,937.50 $ 449,744,421.85 $ 517,813,247.57 Depreciation Profit Tax 21% 21% 21% 21% 21% 21% 21% 21% 160,192,112.54 $ 162,754,884.49 $ 202,024,397.47 $ 240,410,483.53 $ 279,388,726.05 $ 315,206,000.62 $ 355,298,093.26 $ 409,072,465.58 $ 195,917,112.54 $ 223,979,884.49 $ 245,749,397.47 $ 271,635,483.53 $ 301,713,726.05 $ 337,506,000.62 $ 377,623,093.26 $ 420,222,465.58 35,775,000.00 $ 33,596,982.67 $ 36,862,409.62 $ 40,745,322.53 $ 45,257,058.91 S 50,625,900.09 $ 56,643,463.99 $ 63,033,369.84 2,178,017.33 $ (3,265,426.95) $ (3,882,912.91) $ (4,511,736.38) $ (5,368,841.19) $ (6,017,563.90) $ (6,389,905.85) $ 63,033,369.84 $ 30,020,000.00 $ (285,775,000.00) $ (51,904,870.13) $ (29,285,542.46) $ (8,133,515.43) $ 17,123,747.15 $ 46,344,884.86 $ 81,488,436.73 $ 121,233,187.41 $ 263,275,835.42 Earning Less Taxes Total Operating CF Working Capital Working Capital Cash Flow $ (35,775,000.00) S CF on Salvage Projected Net CF $ (285,775,000.00) $ $ (37,369,780.12) PV (48,509,224.42) $ (25,579,126.96) $ (6,639,371.38) $ 13,063,624.71 $ 33,043,262.40 $ 54,299,186.15 $ 75,497,936.17 $ 153,228,933.23 $ (37,369,780.12) NPV Value of Scrap Less Tax 30,020,000.00 TABLE 11A-2 MACRS Depreciation Percentages Class of Investment Ownership Year 3-Year 5-Year 7-Year 10-Year 33.33% 20.00% 14.29% 10.00% 2 44.45 32.00 24.49 18.00 3 14.81 19.20 17.49 14.40 4 7.41 11.52 12.49 11.52 11.52 8.93 9.22 5.76 8.92 7.37 7 8.93 6.55 8. 4.46 6.55 6.56 10 6.55 11 3.28 100% 100% 100% 100% Note: Residential rental property (apartments) is depreciated over a 27.5-year life, whereas commercial and industrial structures are depreciated over 39 years. In both cases, straight-line depreciation must be used. The depreciation allowance for the first year is based, pro rata, on the month the asset was placed in service, with the remainder of the first year's depreciation being taken in the 28th or 40th year. A half-month convention is assumed; that is, an as- set placed in service in February would receive 10.5 months of depreciation in the first year.
Project Parameters Initial Investment $ 235,000,000.00 $ 15,000,000.00 $ 250,000,000.00 $ (250,000,000.00) Equipment Cost Total Investment Investment Cost Salvage Value Opportunity Cost Externalities $ 38,000,000.00 Units Sold, Year 1 Annual Growth Ratw 900,000.00 9% Anhual Change in Units Sold, After Year 1 Sale Pricec per Unit, Yeear 1 Annual Change in Sale Price, After Year 1 Variable Cost (VC), Year 1 Inflation Rate Annual Change in VC, After Year 1 265.00 174.00 2.80% Nonvariable Cost (Non-VC), Year 1 Annual Change in Non-VC, After Year 1 Projected WACC Tax Rate NOWC (Net Operating Working Capital) Optiman Capital Structure 7% 21% 15% Equity 65% Debt Financing 35% Year 2 3 4 900,000.00 $ 1,509,390.10 $ 1,645,235.21 981,000.00 $ 272.42 $ Units 1,069,290.00$ 1,165,526.10 $ 1,270,423.45S 1,384,761.56S Selling $ 265.00 $ 280.05 $ 287.89 $ 295.95 $ 304.24 $ 312.76 $ 321.51 Sales $ 238,500,000.00 $ 267,244,020.00 $ 299,452,269.29 $ 335,542,256.79 $ 375,981,809.57 $ 421,295,137.26 $ 472,069,627.21 $ 528,963,458.68 Inflation 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% 2.80% Variable $ 174.00 $ 178.87 $ 183.88 $ 189.03 $ 194.32 $ 199.76 $ 205.36 $ 211.11 MACRS 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% 8.93% 4.46% 35,725,000.00 $ 61,225,000.00 $ 43,725,000.00 $ 31,225,000.00 $ 22,325,000.00 $ 22,300,000.00 $ 22,325,000.00 $ 11,150,000.00 $ 202,774,826.00 $ 206,018,841.13 $ 255,727,085.41 $ 304,317,067.76 $ 353,656,615.25 $ 398,994,937.50 $ 449,744,421.85 $ 517,813,247.57 Depreciation Profit Tax 21% 21% 21% 21% 21% 21% 21% 21% 160,192,112.54 $ 162,754,884.49 $ 202,024,397.47 $ 240,410,483.53 $ 279,388,726.05 $ 315,206,000.62 $ 355,298,093.26 $ 409,072,465.58 $ 195,917,112.54 $ 223,979,884.49 $ 245,749,397.47 $ 271,635,483.53 $ 301,713,726.05 $ 337,506,000.62 $ 377,623,093.26 $ 420,222,465.58 35,775,000.00 $ 33,596,982.67 $ 36,862,409.62 $ 40,745,322.53 $ 45,257,058.91 S 50,625,900.09 $ 56,643,463.99 $ 63,033,369.84 2,178,017.33 $ (3,265,426.95) $ (3,882,912.91) $ (4,511,736.38) $ (5,368,841.19) $ (6,017,563.90) $ (6,389,905.85) $ 63,033,369.84 $ 30,020,000.00 $ (285,775,000.00) $ (51,904,870.13) $ (29,285,542.46) $ (8,133,515.43) $ 17,123,747.15 $ 46,344,884.86 $ 81,488,436.73 $ 121,233,187.41 $ 263,275,835.42 Earning Less Taxes Total Operating CF Working Capital Working Capital Cash Flow $ (35,775,000.00) S CF on Salvage Projected Net CF $ (285,775,000.00) $ $ (37,369,780.12) PV (48,509,224.42) $ (25,579,126.96) $ (6,639,371.38) $ 13,063,624.71 $ 33,043,262.40 $ 54,299,186.15 $ 75,497,936.17 $ 153,228,933.23 $ (37,369,780.12) NPV Value of Scrap Less Tax 30,020,000.00 TABLE 11A-2 MACRS Depreciation Percentages Class of Investment Ownership Year 3-Year 5-Year 7-Year 10-Year 33.33% 20.00% 14.29% 10.00% 2 44.45 32.00 24.49 18.00 3 14.81 19.20 17.49 14.40 4 7.41 11.52 12.49 11.52 11.52 8.93 9.22 5.76 8.92 7.37 7 8.93 6.55 8. 4.46 6.55 6.56 10 6.55 11 3.28 100% 100% 100% 100% Note: Residential rental property (apartments) is depreciated over a 27.5-year life, whereas commercial and industrial structures are depreciated over 39 years. In both cases, straight-line depreciation must be used. The depreciation allowance for the first year is based, pro rata, on the month the asset was placed in service, with the remainder of the first year's depreciation being taken in the 28th or 40th year. A half-month convention is assumed; that is, an as- set placed in service in February would receive 10.5 months of depreciation in the first year.
Chapter11: The Cost Of Capital
Section: Chapter Questions
Problem 19PROB
Related questions
Question
We assume that the company you selected is considering a new project. The project has 8 years’ life. This project requires initial investment of $235 million to purchase the building, and purchase equipment, and $15 million for shipping & installation fee. The fixed assets (Total of 235+15= $250 M) fall in the 7-year MACRS class. The salvage value of fixed assets is $38 million. The number of units of the new product expected to be sold in the first year is 900,000 and expected to grow at annual growth rate of 9%. The sales price is $265 per unit and the variable cost is $174 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.8%. The
required net operating working capital (NOWC) for each year is 15% of sales for that year. The company is in the 21% tax bracket. The company’s optimal capital structure is 65% equity and 35 debt financing. Assume a WACC of 7 % based on target capital structure of this firm. (This WACC probably is different than your estimates above). Compute the
Attached is the work I've done so far. I need to know if my answer is correct and if I've completely answered the question.
Transcribed Image Text:Project Parameters
Initial Investment
$ 235,000,000.00
$ 15,000,000.00
$ 250,000,000.00
$ (250,000,000.00)
Equipment Cost
Total Investment
Investment Cost
Salvage Value
Opportunity Cost
Externalities
$ 38,000,000.00
Units Sold, Year 1
Annual Growth Ratw
900,000.00
9%
Anhual Change in Units Sold, After Year 1
Sale Pricec per Unit, Yeear 1
Annual Change in Sale Price, After Year 1
Variable Cost (VC), Year 1
Inflation Rate
Annual Change in VC, After Year 1
265.00
174.00
2.80%
Nonvariable Cost (Non-VC), Year 1
Annual Change in Non-VC, After Year 1
Projected WACC
Tax Rate
NOWC (Net Operating Working Capital)
Optiman Capital Structure
7%
21%
15%
Equity
65%
Debt Financing
35%
Year
2
3
4
900,000.00 $
1,509,390.10 $ 1,645,235.21
981,000.00 $
272.42 $
Units
1,069,290.00$
1,165,526.10 $ 1,270,423.45S
1,384,761.56S
Selling $
265.00 $
280.05 $
287.89 $
295.95 $
304.24 $
312.76 $
321.51
Sales
$ 238,500,000.00 $ 267,244,020.00 $ 299,452,269.29 $ 335,542,256.79 $ 375,981,809.57 $ 421,295,137.26 $ 472,069,627.21 $ 528,963,458.68
Inflation
2.80%
2.80%
2.80%
2.80%
2.80%
2.80%
2.80%
Variable $
174.00 $
178.87 $
183.88 $
189.03 $
194.32 $
199.76 $
205.36 $
211.11
MACRS
14.29%
24.49%
17.49%
12.49%
8.93%
8.92%
8.93%
4.46%
35,725,000.00 $ 61,225,000.00 $ 43,725,000.00 $ 31,225,000.00 $ 22,325,000.00 $ 22,300,000.00 $ 22,325,000.00 $ 11,150,000.00
$ 202,774,826.00 $ 206,018,841.13 $ 255,727,085.41 $ 304,317,067.76 $ 353,656,615.25 $ 398,994,937.50 $ 449,744,421.85 $ 517,813,247.57
Depreciation
Profit
Tax
21%
21%
21%
21%
21%
21%
21%
21%
160,192,112.54 $ 162,754,884.49 $ 202,024,397.47 $ 240,410,483.53 $ 279,388,726.05 $ 315,206,000.62 $ 355,298,093.26 $ 409,072,465.58
$ 195,917,112.54 $ 223,979,884.49 $ 245,749,397.47 $ 271,635,483.53 $ 301,713,726.05 $ 337,506,000.62 $ 377,623,093.26 $ 420,222,465.58
35,775,000.00 $ 33,596,982.67 $ 36,862,409.62 $ 40,745,322.53 $ 45,257,058.91 S 50,625,900.09 $ 56,643,463.99 $ 63,033,369.84
2,178,017.33 $ (3,265,426.95) $ (3,882,912.91) $ (4,511,736.38) $ (5,368,841.19) $ (6,017,563.90) $ (6,389,905.85) $ 63,033,369.84
$ 30,020,000.00
$ (285,775,000.00) $ (51,904,870.13) $ (29,285,542.46) $ (8,133,515.43) $ 17,123,747.15 $ 46,344,884.86 $ 81,488,436.73 $ 121,233,187.41 $ 263,275,835.42
Earning Less Taxes
Total Operating CF
Working Capital
Working Capital Cash Flow $ (35,775,000.00) S
CF on Salvage
Projected Net CF
$ (285,775,000.00) $
$ (37,369,780.12)
PV
(48,509,224.42) $ (25,579,126.96) $ (6,639,371.38) $ 13,063,624.71 $ 33,043,262.40 $ 54,299,186.15 $ 75,497,936.17 $ 153,228,933.23 $ (37,369,780.12)
NPV
Value of Scrap Less Tax
30,020,000.00
Transcribed Image Text:TABLE 11A-2
MACRS Depreciation Percentages
Class of Investment
Ownership Year
3-Year
5-Year
7-Year
10-Year
33.33%
20.00%
14.29%
10.00%
2
44.45
32.00
24.49
18.00
3
14.81
19.20
17.49
14.40
4
7.41
11.52
12.49
11.52
11.52
8.93
9.22
5.76
8.92
7.37
7
8.93
6.55
8.
4.46
6.55
6.56
10
6.55
11
3.28
100%
100%
100%
100%
Note:
Residential rental property (apartments) is depreciated over a 27.5-year life, whereas commercial and industrial
structures are depreciated over 39 years. In both cases, straight-line depreciation must be used. The depreciation
allowance for the first year is based, pro rata, on the month the asset was placed in service, with the remainder of
the first year's depreciation being taken in the 28th or 40th year. A half-month convention is assumed; that is, an as-
set placed in service in February would receive 10.5 months of depreciation in the first year.
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