Reference no: EM131539394

Taurus Inc. hires you to evaluate the acquisition of a wind power plant. The plant’s basic price is $100 million, and would cost another $20 million to modify it for special use by the firm. The plant falls into the MACRS 5-year class, and would be sold after 5 years for an estimated $40 million at market value. The wind power plant is expected to increase Taurus’s sales revenue by $45 million at Year 1, thereafter growing by 4% per year till the end of project life. The plant will also increase Taurus’ operating costs (i.e., COGS + SGA expenses) by $10 million at Year 1, thereafter growing by 5% per year till the end of project life. Net operating working capital equals 15% of sales revenue projected for the subsequent year. Taurus’s WACC is estimated to be 8.50% based on its existing business risk level. Taurus also has a time-constraint policy that requires the full initial investment to be paid back within 5 years. The applicable federal-plus-state marginal tax rate is 40%. QUESTIONS: 1) What is the net free cash flow amount of this wind project for Years 0, 1, 2, 3, 4 and 5, respectively? 2) Should Taurus purchase the wind power plant or not, provided such a development will not considerably alter Taurus’s existing business risk level? (Apply all appropriate major decision rules that you have learned in this course.) Assume Taurus has another investment alternative: to upgrade the existing “fuel-fired power plant”, costing $50 million at Year 0 and generating a net free cash flow of $25 million at Year 1, $20 million at Year 2, $15 million at Year 3, $10 million at Year 4, $5 million at Year 5, $1 million at Year 6, and negative $5 million at Year 7. Also assume (a) the wind and fuel plant projects are both repeatable (renewable) instead of “one-time deal”, and (b) these two power plant projects are mutually exclusive. Which power plant(s) shall be built?