Question

Your firm is considering building a $594 million plant to manufacture HDTV circuitry. You expect operating profits (EBITDA) of $140 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 $291 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 4.9%, the expected return of the market is 10.1%, 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 $475 million of the cost of the plant using ten-year, 9.5% 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? a. If the risk-free rate is 4.9%, the expected return of the market is 10.1%, and the asset beta for the consumer electronics industry is 1.66, what is the NPV of the project? The NPV of the project in this case is $ million. (Round to one decimal place.) Enter your answer in the answer box and then click Check Answer. Dart

Answer 1

@ Calculation : Annual Cash inflows for ten years EBITDA 2 $ 140 million less depreciation - $ 59.4 million (514) 10 HH uwen · Terminal Cash inflow = Release of working Capital After tex Salvage value - Sot 2910.65 = $ 239.15 million 7 Initial Outtlew = Cest of plant + working - = 594 + 50 $644 milliona > Required return = Ret Rim Rfx Beta = 74.9+(1001-4.9 x 66 2 = 13.532 % > Hence, NPV = PV of Cash idlows - Initial Outflow = (11 79 X PVAF (13'532%.910)+23415 x PUF 774* (13.58%,10 694 - $22.4 millien (rounded off) Hall

and therefore profect = required arted average return cost on of Capiz Now, debt is also used to praised w = 425 x Cast of debt + " x = 0.8x9.5(1-0.35 + 0.2 x 13-532 = 7.6964 % Hence, NPV = 111.79 PUAF7.6464%, 10 + 239.15X PUIF (7.6464 % , lo - 644 = $ 239.5 millions