1. As the key financial manager of Psycho Systems, a manufacturer of internet eq
ID: 2672419 • Letter: 1
Question
1. As the key financial manager of Psycho Systems, a manufacturer of internet equipment, you are considering building a new plant. The new plant has an initial cost of $600 million, will last 5 years, and will be depreciated to a book value of $100 million on a straight-line basis. The salvage value of this new plant is expected to be $150 million. Sales and costs are expected to be $240 million and $80 million, respectively, in each of the five years the plant is in existence. In addition, inventories will immediately (t=0) rise by $20 million and accounts payable will rise immediately (t=0) by $50 million. Accounts receivable will rise by $30 million at the end of the 1st year (t=1). Inventories, accounts receivable and accounts payable will return to original levels at the end of the project’s life. If the WACC for this project is 10% and the marginal tax rate is 25% and the capital gains tax rate is 25%, what is the NPV of the plant? Be sure to organize and label your work so that I can clearly see what you are doing. I have provided a table with rows to help present your work. There should be more than enough lines.NPV = ___________ ? BE SURE TO PUT YOUR FINAL ANSWER HERE!!!!!!
TIME ?
0
1
2
3
4
5
Final CFs
Explanation / Answer
NPV = 635.04-657.27 = -22.23 answer
Happy to help
Year
0 1 2 3 4 5 Cash outflow 600
Increase in working capital -30
Increase in working capital
30
Discounting factor
0.909091
Present value of cash outflow 630 27.27273
Present value of cash outflow - total 657.2727
sales
240 240 240 240 240 Costs
80 80 80 80 80 depreciation
100 100 100 100 100 EBT
60 60 60 60 60 Tax
15 15 15 15 15 EAT
45 45 45 45 45 Add - depreciatio
100 100 100 100 100 Total cash flow
145 145 145 145 145 Salvage value
150 Less tax on salvage value
12.5 Net salvage value
137.5 Working capital
Nil Discounting factor
0.909091 0.826446 0.751314801 0.683013 0.620921 Presnet value of cash inflows
131.8182 119.8347 108.9406461 99.03695 175.4103 Presnet value of cash inflows - total
635.0408
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