Reference no: EM133186663
Question - Cash Flow Estimation - Assume that a company you selected is considering a new project. The project has 8 years' life. This project requires initial investment of $235 million to purchase the building, and purchase equipment, and $15 million for shipping & installation fee. The fixed assets (Total of 235+15= $250 M) fall in the 7-year MACRS class. The salvage value of fixed assets is $38 million. The number of units of the new product expected to be sold in the first year is 900,000 and expected to grow at annual growth rate of 9%. The sales price is $265 per unit and the variable cost is $174 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.8%. Therequired net operating working capital (NOWC) for each year is 15% of sales for that year. The company is in the 21% tax bracket. The company's optimal capital structure is 65% equity and 35 debt financing. Assume a WACC of 7 % based on target capital structure of this firm.
1. Compute the depreciation basis and annual depreciation of the new project.
2. Estimate annual net cash flows of the project for all the 8 years.
3. Draw a timeline of the cash flows.
Capital Budgeting Analysis
1. Which WACC should you use for this project evaluation?
2. Using your best choice above, apply various methods of project evaluation (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project. Should it be accepted or rejected?
3. Perform a sensitivity analysis for the effects of key variables (e.g., , cost of capital, unit costs, sales price) on the estimated NPV in order to demonstrate the sensitivity of the model. The Scenario analysis of several variables simultaneously is encouraged, but not required.
4. Discuss whether the project should be taken and summarize your report.
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