1) You are a manager at Percolated Fiber (PF) which is considering expanding its
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Question
1) You are a manager at Percolated Fiber (PF) which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office and asks you to put together an analysis on whether or not the firm should spend $30 million on new plant & equipment ($20 million up front and $10 million during the first year). After reviewing the plans you come up with the following forecasts on the decision: general sales and administrative expenses 2, depreciation expense 3 (assume starts in year 2 when operations begin), cost of goods sold 18, sales revenue 30, change in NWC per year 1.5, and capital expenditure 30 (all in millions of dollars). The WACC for PF is 14%. Assume the cash flows are constant each year . (50 pts.)
Years 0-11
Revenue
Cost of Goods Sold
General Sales & Admin Expense
Depreciation Expense
EBIT
Taxes (35%)
Operating Income AT
Depreciation Expense
Change in NWC
Capital Expenditure
Free Cash Flow
a. 1st Scenario: Calculate the payback period, NPV, IRR and MIRR of the project assuming a 10-year useful life. At the end of ten years, you believe you can sell the equipment for $2 mil on an AT basis. Should you accept the project? Why or why not? Explain your answer.
b. 2nd Scenario: More realistically, the plant will continue to exist as long as the company exists
Years 0-11
Revenue
Cost of Goods Sold
General Sales & Admin Expense
Depreciation Expense
EBIT
Taxes (35%)
Operating Income AT
Depreciation Expense
Change in NWC
Capital Expenditure
Free Cash Flow
You are a manager at Percolated Fiber (PF) which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office and asks you to put together an analysis on whether or not the firm should spend $30 million on new plant & equipment ($20 million up front and $10 million during the first year). After reviewing the plans you come up with the following forecasts on the decision: general sales and administrative expenses 2, depreciation expense 3 (assume starts in year 2 when operations begin), cost of goods sold 18, sales revenue 30, change in NWC per year 1.5, and capital expenditure 30 (all in millions of dollars). The WACC for PF is 14%. Assume the cash flows are constant each year. (50 pts.) 1st Scenario: Calculate the payback period, NPV, IRR and MIRR of the project assuming a 10-year useful life. At the end of ten years, you believe you can sell the equipment for $2 mil on an AT basis. Should you accept the project? Why or why not? Explain your answer. 2nd Scenario: More realistically, the plant will continue to exist as long as the company exists - indefinitely. Assume all cash flows remain the same but now rather than the project ending after 10 years, it continues to exist growing continuously at 2% a year forever. Calculate the NPV, IRR and MIRR. Should you accept the project? Why or why not? Explain your answer. 3rd Scenario: If the plant continues to exist, the company will have to spend a large amount on maintenance. Assume Percolated Fiber incurs an added one time maintenance expense of $15 million in year 9. Calculate the NPV, IRR and MIRR of the project assuming a continuous life and an additional maintenance expense in year 9. Should you accept the project? Why or why not? Explain your answer? Assuming the firm has 3.5 mill shares outstanding and is trading at $35 per share, if the 3rd scenario occurs, will there be any impact on the market capitalization of the firm? If the market is efficient, what will the exact impact be? (give a numerical as well as qualitative answer to this question) if the new plant were located outside of the United States, would you use the same discount rate for this project as the company as a whole? Why or whyExplanation / Answer
ou are a manager at Percolated Fiber, which is considering expanding its operations in synthetic fiber manufacturing. Your boss comes into your office, drops a consultant
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