2)Your firm (a shampoo maker) has decided to enter a new industry: Doughnuts. Bu

Question

2)Your firm (a shampoo maker) has decided to enter a new industry: Doughnuts. Bubbles Doughnuts will compete with Dunkin Donuts and Krispy Kreme. You will try to exploit your current customer base, women who like to pamper themselves and secretly eat a lot of doughnuts. There will be 25 locations. The combined land and construction cost for all 25 sites will be $20million. Construction will be completed in one year. The land is approximately one quarter of the cost and cannot be depreciated. The remaining fixed costs will be depreciated 20 year straight line. After twenty years of operation, you will exit the business. You anticipate the doughnut shops to have no salvage value but the land can be sold for $7m (net, so after all relevant taxes have been paid) When you open for business after construction is complete, each shop is expected to average sales of $2m/yr. and have operating costs of $1.8m/yr. over its twenty-year life (both of these are end of year figures). The entire operation will require $1m in working capital upon the completion of construction and an additional $0.1m in each of the first five years of operation. That working capital will be recouped in equal increments in the final two years of operation as inventories are eliminated Your firm's CEO's worthless brother-in-law, who has a longstanding, lifetime contract with the company for $500,000/yr., has been assigned as the head of operations at the corporate office He has hired new staff to do the actual work at corporate headquarters at a cost of $250,000/yr beginning in the first year of operations. There are no other new corporate expenses. You firm's WACC is 10%. A freestanding doughnut chain with a Debt/Equity-4 (the same as your firm) has a cost of debt equal to 9% and a cost of equity equal to 16%. The corporate tax rate for both companies is 33%. What is this project's NPV?

Explanation / Answer

Please Provide feedBack Thanks in advance.. :-)

Initial investments cost of land and construction 20 Working capital 1 21 Operational Cash flows Average sales 2x 25 50 less: Operational Cost 1.8 x 25 45 Less: Additional Expenses .25 per year 0.25 Less: Depreciation 20x3/4x1/20 0.75 PBT 4 less; tax@33% 1.32 PAT 2.68 Add; Depreciaion 0.75 CFAT 3.43 Calculation Of WACC for the Project 9x(1-0.33)x4/5 + 16/5 8.024% Calculation of pv of cashflows of intermediate working capital Amt PVF@8.024% PV 1st yr 0.1 0.92572 0.092572 6th yr 0.1 0.62933 0.062933 11th yr 0.1 0.427836 0.042784 15th yr 0.1 0.314193 0.031419 0.229708 WC Recovery 0.7 0.230736 0.161515 0.7 0.213597 0.149518 0.311033 Net wc Inflow(Present value) 0.081325 Calculation of PV Of post tax salvage value 7x1/(1.08024)^20 1.495178 Calculation Of NPV Cash Flows Amount PVF@8.024% PV Initial Investment 11 1 21 CFAT (20 yrs) 3.43 9.800637 33.61619 WC 0.081325 Salvage value 1.495178 NPV 14.19269

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.