Question

A = 9

B = 1

C = 7

D = 3

Suppose ABC firm is considering an investment that would extend the life of one of its facilities for 5 years. The project would require upfront costs of $8M plus $42M investment in equipment. The equipment will be obsolete in 11 years and will be depreciated via straight-line over that period (Assume that the equipment can't be sold). During the next 5 years, ABC expects annual sales of 60M per year from this facility. Material costs and operating expenses are expected to total 31M and 2.8M, respectively, per year. ABC expects no net working capital requirements for the project, and it pays a tax rate of 33%. ABC has 79% of Equity and the remaining is in Debt. If the Cost of Equity and Debt are 17% and 6% respectively, should they take the project?

*I need the WACC, Incremental FCF at year 1, FCF at year 2, FCF at year 3, FCF at year 4, FCF at year 5, and the NPV*

Answer 1

Lets find out the WACC first

So the WACC   =   14.27% which we will use as the discounting rate to find NPV

The Cash Flows and the NPV are as under

equipment cost is depriciated over 11 year on SLM- so per year depriciatin will be 42,000,000/11 =   3,818,181.82

Depriciation is Added to the Net Inome to arrive at the operating Cash flow( since it is a non cash item)

The Cash flows for each year are highlighted in grey color. these are discounted at WACC of14.27% and the discounted Cash flows are highlighted in blue color.

The sum of these Discounted CF is highlighted in green color which is the NPV

The NPV of the project is 14,173,050.21

The excel formulas are :