Question

Your firm is considering building a $590 million plant to manufacture HDTV circuitry. You expect operating profits​ (EBITDA) of $135 million per year for the next ten years. The plant will be depreciated on a​ straight-line basis over ten years​ (assuming no salvage value for tax​ purposes). After ten​ years, the plant will have a salvage value of $290 million​ (which, since it will be fully​ depreciated, is then​ taxable). The project requires $50 million in working capital at the​ start, which will be recovered in year ten when the project shuts down. The corporate tax rate is 35%. All cash flows occur at the end of the year.

a. If the​ risk-free rate is 4.6%​, the expected return of the market is 11.6%​, and the asset beta for the consumer electronics industry is 1.66​, what is the NPV of the​ project?

b. Suppose that you can finance $472 million of the cost of the plant using​ ten-year, 9.3% coupon bonds sold at par. This amount is incremental new debt associated specifically with this project and will not alter other aspects of the​ firm's capital structure. What is the value of the​ project, including the tax shield of the​ debt?

Please give the correct details of answers of each question. That's all. Thank you.

Answer 1

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