Question

Stanley Industries is evaluating a proposal to expand its current distribution facilities. Management has projected that the project will produce the following additional cash flows for the first two years (in millions) Year Revenues Operating Expense 1200 1400 450525 240 280 Depreciation Increase in working capital 60 Capital expenditures Marginal corporate tax rate 30% 70 350 30% 300 Note 1: the incremental EBIT from the project refers to the additional (incremental) cash flows in each year as given in the table. This is not, for example, a difference between year 1 and yearf2 cash flows. Note 2: The problem makes no assumptions about whether increase in the Net Working Capital is permanent or not. It is correct to assume that this additional NWC is recovered much later (and therefore can be ignored). It is also acceptable to assume that NWC is recovered in year 3 (state your assumptions).

Answer 1

1 2 4 Cost Revenue Operatin expenses Tax Increase in WC Capital exp 500.00 1200.00 1400.00 -450.00 -525.00 -153.00 178.50 60.00 70.00 300.00350.00 12 13 Cash flow PV @10% NPV -500.00 237.00 276.50 500.00 215.45 228.51 56.03 It should not engage in the project. 15 Note: Assumed that working capital will be recovered much later and hence ignored 16