Reference no: EM131913283

You are considering building a factory. The initial cost to build the factory is $3 billion, the factory will last 5 years and have a salvage value of $1 billion. You plan to use straight line depreciation and depreciate the factory towards a book value of $0.4 billion. Sales from the factory are expected to be $2 billion each year for the next 5 years and costs (other than depreciation) are 60% of revenues. Additional capital expenditures of $100 million will be required at the end of each of the next 5-years (i.e., at t=1,2,3,4 and 5) . Inventories and A/P will immediately rise by $500 million and $100 million respectively and remain at these levels until returning to back to original levels at the end of the project (t=5). A/R will rise by $400 million after the 1st year (i.e., at t=1) and remain at that level until falling back to original levels at the end of the project’s life (t=5). If the WACC for the project is 15%, the marginal tax rate is 40% and the capital gains tax rate is 40%. a) What is the project’s NPV? b) Suppose it turns out that you are using an existing structure that you built 5 years ago for $550 million, but that still required the $3 billion to adapt for current purposes. In addition, you can rent the building for the equivalent of $100 million FCFF each year. How does this affect your decision?