Beats wants to build a new factory to produce its headphones. It will cost $230
ID: 2826719 • Letter: B
Question
Beats wants to build a new factory to produce its headphones. It will cost $230 million initially to build the factory over the course of 12 months, which will be worthless after 10 years. The factory will be depreciated linearly to $0 over 10 years. Beats already owns the land on which the factory will be built. The land is currently worth $10 million and was purchased for $2 million eight years ago. After completion of the factory at the end of year 1, Beats expects earnings before interest and taxes (EBIT) of $34 million each year for 10 years. The company also has to add inventory (components) worth $13 million just before operation starts at the end of the first year. Beat's marginal tax rate is 21% and its cost of capital is 6%.
What is the free cash flow in year 0 (in $ million)?
What is the free cash flow in year 1 (in $ million)?
What is the annual depreciation in year 2 (in $ million)?
What is the free cash flow in year 2 (in $ million)?
What is the free cash flow in year 11 (in $ million)?
What is the NPV of this project (in $ million)?
Explanation / Answer
1.What is the free cash flow in year 0 (in $ million)?
Answer) Net Cash Out flow of 230 million
2.What is the free cash flow in year 1 (in $ million)?
Answer) Cash Inflow of $36.86 Million.
What is the annual depreciation in year 2 (in $ million)?
Answer) $230 Million/10 years = $23 Million.
What is the free cash flow in year 2 (in $ million)?
Answer) Cash Inflow of $49.86 Million.
What is the free cash flow in year 11 (in $ million)?
There will be no Cash flows at the end of 11th year.
= (49.86/.06) x 0.943396
=
What is the NPV of this project (in $ million)?
Answer) NPV is $108.3 Million
Working Notes:
($ in Millions)
1.What is the free cash flow in year 0 (in $ million)?
Answer) Net Cash Out flow of 230 million
2.What is the free cash flow in year 1 (in $ million)?
Answer) Cash Inflow of $36.86 Million.
What is the annual depreciation in year 2 (in $ million)?
Answer) $230 Million/10 years = $23 Million.
What is the free cash flow in year 2 (in $ million)?
Answer) Cash Inflow of $49.86 Million.
What is the free cash flow in year 11 (in $ million)?
There will be no Cash flows at the end of 11th year.
= (49.86/.06) x 0.943396
=
What is the NPV of this project (in $ million)?
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