Question

You've been asked to do a capital budgeting evaluation of a new factory. The initial cost to build the factory is $100 million, the factory will be run for 10 years and has an estimated salvage value equal to zero. Accounting tells you to use straight-line depreciation over 10-years to a book value of zero. Sales from the factory are expected to be 50 million each year for the next 10 years (t=1 to 10) and costs (other than depreciation but inclusive of COGS, SGA, etc.) are 55% of revenues. Inventories and A/P will immediately rise by $15 million and $7.5 million respectively and remain at these levels until returning to back to original levels at the end of the project (t=10). A/R will rise to $10 million after the 1st year (i.e., at t=1) and remain at that level until falling back to original levels at the end of the project’s life (t=10). If the WACC for the project is 8%, the marginal tax rate is 20%, answer the following questions:
What is the FCFF at t=1
What is the FCFF at t=2
What is the FCFF at t=10
What is the NPV of the project?

Answer 1