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In: Finance

Beats wants to build a new factory to produce its headphones. It will cost $230 million...

Beats wants to build a new factory to produce its headphones. It will cost $230 million initially to build the factory over the course of 12 months, which will be worthless after 10 years. The factory will be depreciated linearly to $0 over 10 years. Beats already owns the land on which the factory will be built. The land is currently worth $10 million and was purchased for $2 million eight years ago. After completion of the factory at the end of year 1, Beats expects earnings before interest and taxes (EBIT) of $34 million each year for 10 years. The company also has to add inventory (components) worth $13 million just before operation starts at the end of the first year. Beat's marginal tax rate is 21% and its cost of capital is 6%.

What is the free cash flow in year 0 (in $ million)?

What is the free cash flow in year 1 (in $ million)?

What is the annual depreciation in year 2 (in $ million)?

What is the free cash flow in year 2 (in $ million)?

What is the free cash flow in year 11 (in $ million)?

What is the NPV of this project (in $ million)?

Solutions

Expert Solution

1.What is the free cash flow in year 0 (in $ million)?

Answer) Net Cash Out flow of 230 million

2.What is the free cash flow in year 1 (in $ million)?

Answer) Cash Inflow of $36.86 Million.

What is the annual depreciation in year 2 (in $ million)?

Answer) $230 Million/10 years = $23 Million.

What is the free cash flow in year 2 (in $ million)?

Answer) Cash Inflow of $49.86 Million.

What is the free cash flow in year 11 (in $ million)?

There will be no Cash flows at the end of 11th year.

= (49.86/.06) x 0.943396

=

What is the NPV of this project (in $ million)?

Answer) NPV is $108.3 Million

Working Notes:

($ in Millions)
($ in Millions)
Particulars Year 0 Year 1 Year 2 Year 3 - 10 Total
Initial Investment -230.00
Earnings before Interest & Tax 34.00 34.00 34.00
Less:
Tax @21% 7.14 7.14 7.14
Earnings after Tax 26.86 26.86 26.86
ADD:
Depreciation 23.00 23.00 23.00
Capital Expenditure 13.00 0.00 0.00
Free cash Flows -230.00 36.86 49.86 49.86
PVF@ 6% 1.00 0.94 0.89 5.20
Net Cash flows/NPV of The Project -230.00 34.77 44.38 259.15 108.30

jeff jeffy answered 2 years ago
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