show all work please As the new CEO of Pemrose Corp (Carlton Whitfield), you are

Question

show all work please

As the new CEO of Pemrose Corp (Carlton Whitfield), you are announcing a bold new expansion plan. This entails building a new factory. The initial cost is $500 million, it will last 8 years and is depreciated straight-line to a book value of 0. Salvage value of the factory at t = 8 is $100 million. Annual sales and costs will be $300 million and $200 million respectively (in all 8 years). Inventories will rise immediately by $15 million and A/P will rise immediately by $30 million. A/R will rise at the end of the first year by $20 million (t 1). All working capital components return to original values at the end of the project's life. WACC-10% and = 30%. What is the NPV?

Explanation / Answer

WC = CA – CL

WC = CA - CL

At t = 0, WC = 15 – 30 = -15

At t = 1, WC = 20 – 0 = 20

At t = 1, net required WC = -15 + 20 = 5

EBITDA = 300 – 200 = 100; after tax = 100*0.7 = 70

NPV = $18.92 million

0 1 2 3 4 5 6 7 8 Initial cost -500.00 A Depreciation 62.50 62.50 62.50 62.50 62.50 62.50 62.50 62.50 Tax saving on depreciation 30% 18.75 18.75 18.75 18.75 18.75 18.75 18.75 18.75 B Book value 0.00 Market value 100.00 After-tax MV = MV-(MV-BV)*Tax 70.00 C Net change in WC 15.00 -5.00 5.00 D after-tax cash flow (P-C)*(1-T) 70.00 70.00 70.00 70.00 70.00 70.00 70.00 70.00 E FCF -485.00 83.75 88.75 88.75 88.75 88.75 88.75 88.75 163.75 sum A to E NPV @ 10% 18.92

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