You are considering building a factory. The initial cost to build the factory is $3 billion. The factory will last 5 years and you plan to use straight line depreciation and depreciate the factory to a book value of $0 billion. Sales from the factory are expected to be 3 billion each year for the next 5 years and costs (other than depreciation) are 50% of revenues. Additional capital expenditures of $100 million will be required at the end of each of for the next 5-years (i.e., at t=1, 2, 3, 4 and 5). Inventories and A/P (account payable) 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 (account receivable) 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 projects life (t=5). If the WACC for the project is 15%, the tax rate is 40%.
(a) What is the projectâs NPV?
(b) It turns out that you are using an existing structure that you built 5 years ago. You could have rented out the building for the equivalent of $100 million each year. How does this affect your decision?
You are considering building a factory. The initial cost to build the factory is $3 billion. The factory will last 5 years and you plan to use straight line depreciation and depreciate the factory to a book value of $0 billion. Sales from the factory are expected to be 3 billion each year for the next 5 years and costs (other than depreciation) are 50% of revenues. Additional capital expenditures of $100 million will be required at the end of each of for the next 5-years (i.e., at t=1, 2, 3, 4 and 5). Inventories and A/P (account payable) 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 (account receivable) 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 projects life (t=5). If the WACC for the project is 15%, the tax rate is 40%.
(a) What is the projectâs NPV?
(b) It turns out that you are using an existing structure that you built 5 years ago. You could have rented out the building for the equivalent of $100 million each year. How does this affect your decision?
