A 20 year expansion project has a depreciable capital outlay of $50 million (straight line depreciation). It also has additional net working capital needs of $5 million. The project is expected to generate revenues of $30 million and expenses of $23 million during each year of the project. There is a debug expense of $3 million in the first year and a salvage value in year 20 is estimated to be $5 million. The tax rate is 30%. The WACC is 11.333%. What is the NPV? Find the IRR of the project. Find the breakeven level of revenues.© BrainMass Inc. brainmass.com October 25, 2018, 7:34 am ad1c9bdddf
First, analyze the information given in the problem.
Number of years of the expansion project n = 20
Initial investment = $50 (million) [all numbers in this problem are in $millions] capital outlay + $5 million increase in net working capital + $3 million debug expense = 50 + 5 + 3 = $58 (this is the negative cash flow at the beginning of the project)
Depreciation = straight line, meaning equal amounts of depreciation every year for 20 years = 50/20 = $2.5 million depreciation annually. Note that the increase in net working capital ($5 million) and the extra debug expense ($3 million) are not depreciated.
Revenues = $30 million for years 1-20
Expenses = $23 million for years 1-20
Salvage value of the initial investment in year 20 = $5 million
Tax rate = 30%
WACC (Weighted Average Cost of Capital) = 11.333%
Next, look at the questions.
Q1. What is the NPV ...
This solution includes a step-by-step solution to how to calculate NPV (net present value), IRR (internal rate of return), and the breakeven point for a 20 year expansion project.
Financial Management - NPV
calculations must be shown in excel
1) Continuous Compounding: Compute the future value of $1,900 continuously compounded for:
a: 5 years at a stated annual interest rate of 12 percent.
b. 3 years at a stated annual interest rate of 10 percent.
c. 10 years at a stated annual interest rate of 5 percent.
d. 8 years at a stated annual interest rate of 7 percent.
2) NPV versus IRR: Consider the following cash flows on two mutually exclusive projects for the Bahamas Recreation Corporation (BRC). Both projects require an annual return of 14 percent.
Year Deepwater Fishing New Submarine Ride
0 -$750,000.00 -$2,100,000.00
1 310.00 1,2000,000.00
2 430,000.00 760,000.00
3 330,000.00 850,000.00
As a financial analyst for BRC, you are asked the following questions:
a. If your decision rule is to accept the project with the greater IRR, which project should you choose?
b. Because you are fully aware of the IRR rule's scale problem, you calculate the incremental IRR for the cash flows. Based on your computation, which project should you choose?
c. To be prudent, you compute the NPV for both projects. Which project should you choose? Is it consistent with the incremental IRR rule?
3) Calculating Project NPV: The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 34 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.
Year 0 Year 1 Year 2 Year 3 Year 4
Sales revenue $8,500.00 $9,000.00 $9,500.00 $7,000.00
Operating costs 1,900.00 2,000.00 2,200.00 1,700.00
Depreciation 4,000.00 4,000.00 4,000.00 4,000.00
Net working capital
spending 200.00 250.00 300.00 200.00 ?
a. Compute the incremental net income of the investment for each year.
b. Compute the incremental cash flows of the investment for each year.
c. Suppose the appropriate discount rate is 12 percent. What is the NPV of the project?
4) Bond Yields: Pembroke Co. wants to issue new 20-year bonds for some much needed expansion projects. The company currently has 10 percent coupon bonds on the market that sell for $1,063, make semiannual payments, and mature in 20 years. what coupon rate should the company set on its new bonds if it wants them to sell at par?
5) Accrued Interest: You purchase a bond with an invoice price of $1,090.00. The bond has a coupon rate of 8.4 percent, and there are 2 months to the next semiannual coupon date. What is the clean price of the bond?View Full Posting Details