It is the end of 1979. At that time, American Chemical Corporation was required

ID: 2722723 • Letter: I

Question

It is the end of 1979. At that time, American Chemical Corporation was required to divest its Sodium Chlorate business located at Collinsville as part of its antitrust agreement. Dixon Corporation expressed interest. The price that they talked about was about $12 million. Dixon is wondering if the Collinsville plant is worth $12 million and they would like to compute the NPV of the investment. They made the following projections of pre-tax profits of the Collinsville plant under their ownership for the next five years. The plant would be liquidated at its book value at the end of 5 years.

Collinsville plant is subject to a 48% tax rate of profits. The $12 million investment in 1979 would be allocated $10,600 towards fixed assets and $1,400 towards working capital. The fixed assets, depreciation and working capital forecasts for the next five years are provided below:

Hint: Capital expenditure = Net PPE this year - Net PPE last year + Depreciation this year.

What are the free cash flows from the Collinsville plant (input your responses rounded to whole numbers and without the comma or $ sign)?

1980: ??

1981: ??

1982: ??

1983: ??

1984: ??

Assume that the plant terminates in Year 5 (i.e. 1984) and that the company sells assets at book value at the end of year 5. What is the terminal value at the end of the project's 5-year life.

Terminal Value ??

End-of-year 1980 1981 1982 1983 1984 Revenues $13,280 $16,800 $19,760 $21,356 $23,028 Total Manufacturing Costs ($10,824) ($12,869) ($14,919) ($16,317) ($17,973) Other Charges (incl. depr.) ($1,623) ($1,713) ($1,806) ($1,905) ($2,029) EBIT $833 $2,218 $3,035 $3,134 $3,026

Explanation / Answer

Year

1980

1981

1982

1983

1984

EBIT

$833,000.00

$2,218,000.00

$3,035,000.00

$3,134,000.00

$3,026,000.00

Less: Tax @ 48%

$399,840.00

$1,064,640.00

$1,456,800.00

$1,504,320.00

$1,452,480.00

Net Income

$433,160.00

$1,153,360.00

$1,578,200.00

$1,629,680.00

$1,573,520.00

Add: Depreciation

$1,060,000.00

$1,110,000.00

$1,160,000.00

$1,210,000.00

$1,270,000.00

Add: Change in net working capital

$204,000.00

-$316,000.00

-$266,000.00

-$144,000.00

-$150,000.00

Less: Capex

$485,000.00

$525,000.00

$560,000.00

$600,000.00

Free Cash Flow

$1,212,160.00

$1,422,360.00

$1,912,200.00

$2,095,680.00

$2,093,520.00

Change in net working capital = NWC in previous year – NWC in current year

Note: As no information regarding interest and debt given, we assume there is no debt.

b) Book Value of assets = Initial Price – Accumulated Depreciation
= $12,000,000 – ($1,060,000 + $1,110,000 + $1,160,000 + $1,210,000 + $1,270,000) = $6,190,000.00

Terminal Value = Book Value of Assets + Recovery of Net Working Capital

= $6,190,000.00 + $1,400,000 = $7,590,000.00