Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $2 million and which it currently rents out for $116,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.30 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of 8 years and to sell the machines and equipment for $460,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.50 million in the first year and to stay constant for 8 years. Total manufacturing costs and operating expenses (excluding depreciation) are 80% of sales, and profits are taxed at 25%. a. What are the free cash flows of the project? b. If the cost of capital is 16%, what is the NPV of the project? a. What are the free cash flows of the project? The FCF for year 0 is $☐ million. (Round to three decimal places.)
Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired three years ago for $2 million and which it currently rents out for $116,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront investment into machines and other equipment of $1.30 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to terminate the project at the end of 8 years and to sell the machines and equipment for $460,000. Finally, the project requires an initial investment into net working capital equal to 10% of predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.50 million in the first year and to stay constant for 8 years. Total manufacturing costs and operating expenses (excluding depreciation) are 80% of sales, and profits are taxed at 25%. a. What are the free cash flows of the project? b. If the cost of capital is 16%, what is the NPV of the project? a. What are the free cash flows of the project? The FCF for year 0 is $☐ million. (Round to three decimal places.)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Arnold Inc. is considering a proposal to manufacture high-end protein bars used as food supplements by body builders. The project requires use of an existing warehouse, which the firm acquired
three years ago for $2 million and which it currently rents out for $116,000. Rental rates are not expected to change going forward. In addition to using the warehouse, the project requires an upfront
investment into machines and other equipment of $1.30 million. This investment can be fully depreciated straight-line over the next 10 years for tax purposes. However, Arnold Inc. expects to
terminate the project at the end of 8 years and to sell the machines and equipment for $460,000. Finally, the project requires an initial investment into net working capital equal to 10% of
predicted first-year sales. Subsequently, net working capital is 10% of the predicted sales over the following year. Sales of protein bars are expected to be $4.50 million in the first year and to stay
constant for 8 years. Total manufacturing costs and operating expenses (excluding depreciation) are 80% of sales, and profits are taxed at 25%.
a. What are the free cash flows of the project?
b. If the cost of capital is 16%, what is the NPV of the project?
a. What are the free cash flows of the project?
The FCF for year 0 is $☐ million. (Round to three decimal places.)
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