We invest $10 million in a furniture factory. The information we have is as foll

Question

We invest $10 million in a furniture factory. The information we have is as follows. The European Union subsidizes the investment up to 60% of the cost and 40% of the interest. Thus, we borrow $30 million and receive $60 million free money from the EU. The agreement is to pay interest and amortize the principal in the next 10 years. The prognosis of the project’s profitability is that revenue the first ten years will be $20 million per annum, the cost of goods sold will be $3.5 million, the SGA expenses will be $9 million, the interest expense will be $1.8 million annually, and the tax rate will be 20%. Furthermore, the T bond rate is 6%, the bond rate for the furniture company is 11%, the bheta of this firm is 2.5, and the ROR for the stock market has been 12% annually. After the first ten year period, the NCF and the expenses will grow forever at a 4% growth rate. Compute the NCF, COC and NPV

Explanation / Answer

Year 1 revenue 20 Cost of goods sold 3.5 SGA exp 9 interest 1.8 profit before tax 5.7 Tax 20% 1.14 NCF for one year 4.56 PV Annunity factor 21% for 10 yrs 4.054 Cash inflow for 10 yrs 18.48624 cash outflow 10 NPV 8.48624 COC(CAPM)= Risk free rate+Beta*(Return from Market- Risk free rate) 6+2.5*(12-6)= 21%

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