Question

Case 2 As of late 2019, Toyota Motor Corporation has twelve engineering and manufacturing facilities in the United States. Recently, Toyota has been considering expanding the production of their gas- electric hybrid drive systems in the U.S. To enable the expansion, they are contemplating investing $1.5 billion at the end of 2019 in a new plant with an expected 10-year life. In the meantime, they also need to invest $30 million upfront in net working capital before the production can take place. The projected financials of the new project for the first year of operation (2020) are as follows: Earnings before interest and taxes (EBIT): S170 million Depreciation expense: $ 150 million Increase in net working capital: $32 million The anticipated unlevered free cash flows from the new plant will grow by 5% for each of the next two years and then 2% per year for the remaining seven years. As a newly hired MBA in the capital budgeting division you have been asked to evaluate the new project using the WACC method. You will estimate the cash flows and compute the appropriate costs of capital and the net present values. You must seek out the information necessary to value the free cash flows but will be provided some directions to follow. Assume that marginal corporate tax rate is 40% 1. In Excel. estimate the project's unlevered free cash flows from Year Oto Year 10 (or equivalently from year 2019 2029. the end year of the project). A template is provided on blackboard.

Answer 1

Solution as below, all amounts in $ Million:

Year	CapEx	Change in Working Capital	EBIT	Depreciation (D)	EBIT (1-T)+T*D with T = 40%	Change in Working Capital	Free Cash Flow (FCF)	Explanation
0	-1500	-30					-1530.00	CapEx and Working capital changes
1			170	150	162.00	-32	130.00	FCF = EBIT (1-T)+T*D, also add any net working capital changes
2							136.50	increase FCF by 5% as given in qn
3							143.33	increase FCF by 5% as given in qn
4							146.19	increase FCF by 2% as given in qn
5							149.12	increase FCF by 2% as given in qn
6							152.10	increase FCF by 2% as given in qn
7							155.14	increase FCF by 2% as given in qn
8							158.24	increase FCF by 2% as given in qn
9							161.41	increase FCF by 2% as given in qn
10						62	226.64	increase FCF by 2% as given in qn and return of working capital