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A proposal to build a $187 million factory is being contemplated to produce a new product....

A proposal to build a $187 million factory is being contemplated to produce a new product. The factory is expected to last 20 years (but can be depreciated immediately according to current accounting rules). The factory is expected to produce 8000 units per year that are expected to be sold for a price of $26,000 each. Variable costs (production labor, raw materials, marketing, distribtuion, etc.) are expected to be $17,000 per unit. Fixed costs (administration, maintenance, repairs, utliities, insurance, real estate taxes, etc.) are expected to be $16 million per year. The tax rate is 21%. The project will require $24 million in inventory (raw materials and finished products) as well as $42 million in receivables (credit for customers). An extra $11 million in cash is required as a safety stock to provide financial flexibility (that enables avoiding running out of cash in case of temporary declines in demand). Suppliers (companies which sell the parts and raw materials that are used in the production of the 8000 units produced by the factory) are expected to provide short-term trade credit that is expected to sum to $17 million in accounts payable

COST OF EQUITY IS 4.668%

Compute the NPV if prices and all costs were expected to rise by 2% per year due to expected inflation

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Expert Solution

   t0   t1   t2   t3   t4   t5   t6   t7   t8   t9   t10   t11   t12   t13   t14   t15   t16   t17   t18   t19   t20
   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'
                                                                                  
sales        212160   216403.2   220731.264   225145.8893   229648.8071   234241.7832   238926.6189   243705.1512   248579.2543   253550.8394   258621.8561   263794.2933   269070.1791   274451.5827   279940.6144   285539.4267   291250.2152   297075.2195   303016.7239   309077.0584
variable cost     -138720   -141494.4   -146886.1983   -147210.7738   -150154.9892   -153158.089   -156221.2508   -159345.6758   -162532.5893   -165783.2411   -169098.9059   -172480.8841   -175930.5017   -179449.1118   -183038.094   -186698.8559   -190432.833   -194241.4897   -198126.3195   -202088.8459
fixed cost       -16320   -16646.4   -16979.328   -17318.91456   -17665.29285   -18018.59871   -18378.97068   -18746.5501   -19121.4811   -19503.91072   -19893.98893   -20291.86871   -20697.70609   -21111.66021   -21533.89341   -21964.57128   -22403.86271   -22851.93996   -23308.97876   -23775.15834
cash flow before tax       57120   58262.4   56865.73766   60616.20096   61828.52498   63065.09548   64326.39739   65612.92534   66925.18384   68263.68752   69628.96127   71021.5405   72441.97131   73890.81073   75368.62695   76875.99949   78413.51947   79981.78986   81581.42566   83213.05417
taxation     -11995.2   -12235.104   -11941.80491   -12729.4022   -12983.99025   -13243.67005   -13508.54345   -13778.71432   -14054.28861   -14335.37438   -14622.08187   -14914.5235   -15212.81397   -15517.07025   -15827.41166   -16143.95989   -16466.83909   -16796.17587   -17132.09939   -17474.74138
tax allowable depreciation       1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5   1963.5
cash flow after tax        47088.3   47990.796   46887.43275   49850.29876   50808.03473   51784.92543   52781.35394   53797.71102   54834.39524   55891.81314   56970.3794   58070.51699   59192.65733   60337.24048   61504.71529   62695.53959   63910.18039   65149.11399   66412.82627   67701.8128
intial investment   -247000                                                                              
working capital    -60000                                                                               60000
net cash flow    -307000   47088.3   47990.796   46887.43275   49850.29876   50808.03473   51784.92543   52781.35394   53797.71102   54834.39524   55891.81314   56970.3794   58070.51699   59192.65733   60337.24048   61504.71529   62695.53959   63910.18039   65149.11399   66412.82627   127701.8128
discount rate @4.668%   1   0.955401842   0.91279268   0.872083808   0.833190476   0.796031716   0.760530167   0.726611923   0.69420637   0.663246044   0.633666492   0.605406134   0.578406136   0.552610287   0.527964886   0.504418625   0.481922484   0.460429628   0.439895315   0.420276794   0.401533224
present value    -307000   44988.24856   43805.64728   40889.77088   41534.79416   40444.80706   39383.99801   38351.56108   37346.71365   36368.69573   35416.76918   34490.21715   33588.34333   32710.47138   31855.94432   31024.12392   30214.39015   29426.14061   28658.79003   27911.76973   51276.52054
present value t1-t20   729687.7168                                                                              
present value t0   -307000                                                                              
NPV   422687.7168                                                                              
                                                                                  
                                                                                  
                                                                                  
                                                                                  
wn 1   1   2   3   4   5   6   7   8   9   10   11   12   13   14   15   16   17   18   19   20  
   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'   000'  
depreciation    9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350   9350  

jeff jeffy answered 1 year ago
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