Question

• The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm's balance sheet.)
• The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost.
• The annual EBIT for this new project will be 18% of the project's cost.
• The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use 35% as the tax rate in this project.
• The hurdle rate for this project is 2.43
• Property, Plant & Equipment, net is 2,130,294 (in thousands)

• Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project
• Your calculations that convert the project's EBIT to free cash flow for the 12 years of the project.
• The following capital budgeting results for the project
  • Net present value
  • Internal rate of return
  • Discounted payback period.
• Your discussion of the results that you calculated above, including a recommendation for acceptance or rejection of the project

Answer 1

	a	Property,Plant and Equipment net	$2,130,294,000
	b=a*10%	Initial Investment(Propert Plant & equipment)	$213,029,400
	c=18%*b	Annual EBIT	$38,345,292
	d=c*(1-0.35)	Annual Earning after tax	$24,924,440
	e=b*5%	Salvage Value	$10,651,470
		Annual Depreciation =(Initial Cost-Salvage Value)/Useful Life
	f	Useful Life in years	12
	g=(b-e)/f	Annual Depreciation (Non cash expense)	$16,864,828
	g=d+g	Annual Operating Cash Flow	$41,789,267
		Cash Flow in year12=41789267+10651470=	$52,440,737
		Present Value(PV) of Cash Flow=(Cash Flow)/((1+i)^N)
		i=discount rate=2.43%=0.0243,N=Year of cash flow
			N	CF	PV=CF/(1.0243^N)
			Year	Cash Flow	Present Value	Cumulative Present Value
			0	($213,029,400)	($213,029,400)	($213,029,400)
			1	$41,789,267	$40,797,879	($172,231,521)
			2	$41,789,267	$39,830,010	($132,401,512)
			3	$41,789,267	$38,885,102	($93,516,410)
			4	$41,789,267	$37,962,610	($55,553,800)
			5	$41,789,267	$37,062,004	($18,491,796)
			6	$41,789,267	$36,182,762	$17,690,966
			7	$41,789,267	$35,324,380	$53,015,346
			8	$41,789,267	$34,486,361	$87,501,708
			9	$41,789,267	$33,668,224	$121,169,931
			10	$41,789,267	$32,869,495	$154,039,426
			11	$41,789,267	$32,089,715	$186,129,141
			12	$52,440,737	$39,313,591	$225,442,732
				TOTAL	$225,442,732
		NET PRESENT VALUE=SUM OF PV	$225,442,732
		Internal Rate of Return	17%
		Discounted Payback Period=Period at which Cumulative Present Value=NIL
		Discounted Payback Period=(5+18491796/35182762)	5.51	Years

F32 X fac =IRR(G17:29) i=discount rate=2.43%=0.0243, N=Year of cash flow N CF PV=CF/(1.0243^N) Cumulative Year Cash Flow Present Value Present Value O ($213,029,400) ($213,029,400) ($213,029,400) 1 $41,789,267 $40,797,879 ($172,231,521) 2 $41,789,267 $39,830,010 ($132,401,512) 3 $41,789,267 $38,885,102 ($93,516,410) 4 $41,789,267 $37,962,610 ($55,553,800) 5 $41,789,267 $37,062,004 ($18,491,796) 6 $41,789,267 $36,182,762 $17,690,966 7 $41,789,267 $35,324,380 $53,015,346 8 $41,789,267 $34,486,361 $87,501,708 9 $41,789,267 $33,668,224 $121,169,931 10 $41,789,267 $32,869,495 $154,039,426 11 $41,789,267 $32,089,715 $186,129,141 12 $52,440,737 $39,313,591 $225,442,732 TOTAL $225,442,732 $225,442,732 17% NET PRESENT VALUE=SUM OF PV Internal Rate of Return