Question

Question: You are starting a new project. This project would last 4 years. The following is the input information that you have collected:

Building cost (1.3% in the first year and then 2.6% every year)	$12,000,000
Equipment cost (MACRS 5 years)	$8,000,000
Net operating working capital requirement (% of Sales)	10%
First year sales (in units)	20,000
Growth rate in units sold	0%
Sales price per unit	$3,000
Variable cost per unit	$2,100
Fixed costs	$8,000,000
Market value of building at the end of year 4	7,500,000
Market value of equipment at the end of year 4	2,000,000
Tax rate	40%
WACC	12%
Inflation growth in sales price per year	2%
Inflation growth in VC per unit per year	2%
Inflation growth in fixed costs per year	1%

1. What is the NPV of this project? (In your calculations use zero decimal spaces/round to the whole numbers).
2. Explain briefly if you think that the project is viable.
3. Discuss the potential sources of long-term finance available to a large company.

Answer 1

a]		0	1	2	3	4
	Sales in units		20000	20000	20000	20000
	Sales price per unit		$                   3,000	$                  3,060	$                    3,121	$                   3,184
	Variable cost per unit		$                   2,100	$                  2,142	$                    2,185	$                   2,229
	Sales revenue		$       6,00,00,000	$      6,12,00,000	$        6,24,20,000	$       6,36,80,000
	Variable costs		$       4,20,00,000	$      4,28,40,000	$        4,37,00,000	$       4,45,80,000
	Fixed costs		$          80,00,000	$         80,80,000	$            81,60,800	$           82,42,408	Total Depn	Ending BV
	Depreciation expense-Building		$             1,56,000	$            3,12,000	$              3,12,000	$             3,12,000	$         10,92,000	$   1,09,08,000
	Depreciation expense-Equipment		$          16,00,000	$         25,60,000	$            15,36,000	$             9,21,600	$         66,17,600	$      13,82,400
	NOI		$          82,44,000	$         74,08,000	$            87,11,200	$           96,23,992
	Tax at 40%		$          32,97,600	$         29,63,200	$            34,84,480	$           38,49,597
	NOPAT		$          49,46,400	$         44,44,800	$            52,26,720	$           57,74,395
	Add: Depreciation		$          17,56,000	$         28,72,000	$            18,48,000	$           12,33,600
	OCF		$          67,02,400	$         73,16,800	$            70,74,720	$           70,07,995
	Capital expenditure [12000000+8000000]	$      2,00,00,000
	Change in NWC	$         60,00,000	$             1,20,000	$            1,22,000	$              1,26,000	$         -63,68,000
	After tax salvage value:
	Building = 7500000+(10908000-7500000)*40% =					$           88,63,200
	Equipment = 2000000-(2000000-1382400)*40% =					$           17,52,960
	FCF	$    -2,60,00,000	$          65,82,400	$         71,94,800	$            69,48,720	$       2,39,92,155
	PVIF at 12%	1	0.89286	0.79719	0.71178	0.63552
	PV at 12%	$    -2,60,00,000	$          58,77,143	$         57,35,651	$            49,45,962	$       1,52,47,448
	NPV	$         58,06,203
b]	The project is viable as the NPV is positive. If the project is undertaken the shareholders' wealt will increase by $5,806,203
c]	Potential sources of LT finance to a large company are:
	*Common equity
	*Retained earnings
	*Preferred stock
	*Bonds
	*Loans from financial institutions
	*Lease finance