Question

TapsiCo is a manufacturer of soft drinks. TapsiCo owns a land in Georgia that can be used for building a Distribution Center (DC). The company has estimated that it will cost $1M to build a high technology DC, which will lead to cost savings of 170 thousand dollars per year.

The company is planning to use the DC for only 3 years and sell it at book value at the end of the third year. The DC has a life-time of 5 years after which its salvage value is $500,000. The company is using a straight-line method for calculating the depreciation.

Assume a tax rate of 20% and a discount rate of 5%. Ignore inflation.

The company wants to conduct a financial analysis of the investment and decide if it should build the DC. Answer the questions below.

Part 1) If TapsiCo decides to build the DC, what would be the projected EBITDA (in thousands of dollars) associated with the investment at the end of year 1? _______________________

part 2)

If TapsiCo decides to build the DC, what would be the projected NOPAT (in thousands of dollars) associated with the investment at the end of year 3? __________________

Part 3)

If TapsiCo decides to build the DC, what would be the projected Free Cash Flow (CFC) in thousands of dollars in each time period asked below? Assume there is no change in the working capital as a result of building the DC.

In the beginning of year 1? ___________________

At the end of year 1? ___________________

At the end of year 2? __________________

At the end of year 3? __________________

Part 4)

If TapsiCo decides to build the DC, what would be the Net Present Value (NPV) in thousands of dollars of the investment? __________________

Part 5)

TapsiCo has the option of not building the DC and instead selling the land in the beggining of the first year. The land will sell for $450,000. With this information should the company build the DC or sell the land? Choose one of the option: 'Build the DC' or "Sell the land"

Answer 1

			.($000)
	Part1)	EBITDA at the end of year 1	$170
	Part2)	NOPAT at the end of year 3:
		EBITDA at the end of year 3	$170
		Cost of asset	$1,000
		Salvage Value	$500
		Useful Life in years=5
		Depreciation expense in year3	$100	(1000-500)/5
		EBIT	$70	(170-100)
		NOPAT=EBIT*(1-Tax rate)	$56	70*(1-0.2)
		CASH FLOW
		NOPAT in each year	$56
		Add : Depreciation (Non cash expense)	$100
		Operating Cash Flow	$156
		Accumulated depreciation at end of year 3	$300	(100*3)
		BookValue at end of Year 3=(1000-300)	$700
		Salvage cash flow in year 3	$700
		Cash flow at end of year 3=156+700	$856
		Free Cash Flow
		At the beginning of year1	($1,000)
		At the end of year1	$156
		At the end of year2	$156
		At the end of year3	$856
		N	FCF	PV=FCF/(1.05^N)
		End of Year	Free Cash flow	Present valueat 5% discount
		0	($1,000)	($1,000)
		1	$156	$148.571
		2	$156	$141.497
		3	$856	$739.445
			TOTAL	$29.513
		Net Present Value (in $000)	$29.513
		Opportunity Cost of using the land	($450)
		SELL the LAND will give higher cash flow
		Hence, ANSWER;
		SELL the LAND