Reference no: EM132946874
Question - Suppose Elon Musk has an existing business making electric bicycles. Sales are so strong that he is considering selling his existing factory and replacing it with a new factory.
A: The current factory can be sold for $100mm; it has a tax value of $50mm. The current factory produces annual after tax cash flow of $50mm. Elon believe that after eight years from now, the existing factory would have a resale value of $20mm with a tax value then of $8mm.
B: A new bicycle factory can be built for $250mm and equipment will cost $300mm plus installation costs of $50mm. Assume the plant and equipment can be built and operational on day one.
C: Expect working capital needs as follows (starting on day one): Increase of $35mm in Accounts Receivable and $50mm of Inventory; expect increased $25mm of Accounts Payable.
D: He initially projects after-tax cash flows of $200mm per year for eight years occurring on the last day of each year, starting at the end of year one and finishing after eight years of operations.
E: Assume that after eight years, Elon gets bored and liquidates the business. Assume the working capital is liquidated and the PP&E is sold for $200mm (assume it had been depreciated to $150mm).
F: Assume a tax rate of 30% and a cost of capital of 16
Required -
What is the aggregate amount of the net terminal cash flows? Not yet present valued!
What is the present value of the terminal cash?
What is the NPV?