show all work please. include formulas that you used! As the new CEO of Pemrose
ID: 2785952 • Letter: S
Question
show all work please. include formulas that you used!
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 O. 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
Considering working capital to be apart of Initial investment.
Initial investment= Fixed Investment + working caiptal investment
= (500+15+20-30)= $505millions
Operating cashflows= Sales- cost- depriciation- tax exp+ depriciation
Depriciation= 500/8=62.50 millions
=300-200-62.50-11.25+62.50= $88.75 millions
Tax= 30%of(300-200-62.50)= $11.25 millions
Terminal cashflows= After tax salvage value+ WC
= 100*(1-0.30)+5= $75
NPV= Pv of All Cashinflows- Initial Investment
Calculation s are done using BAII Plus Calculator:
Go in Cashflow MOde
CF0=-505
CF1= 88.75, F= 7
CF2= 88.75+75= 163.75
I= 10
NPV CPT
NPV=$3.463millions(project is viable)
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