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 $3 million and which it currently rents out for $119,000. 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 $1.3 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 eight years and to sell the machines and equipment for $482,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.8 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80 percent of sales, and profits are taxed at 30 percent. a. What are the free cash flows of the project? b. If the cost of capital is 15%, 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.) The FCF for years 1-7 is $ million. (Round to three decimal places.) The FCF for year 8 is $ million. (Round to three decimal places.) b. If the cost of capital is 15%, what is the NPV of the project?
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 $3 million and which it currently rents out for $119,000. 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 $1.3 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 eight years and to sell the machines and equipment for $482,000. Finally, the project requires an initial investment into net working capital equal to 10 percent of predicted first-year sales. Subsequently, net working capital is 10 percent of the predicted sales over the following year. Sales of protein bars are expected to be $4.8 million in the first year and to stay constant for eight years. Total manufacturing costs and operating expenses (excluding depreciation) are 80 percent of sales, and profits are taxed at 30 percent. a. What are the free cash flows of the project? b. If the cost of capital is 15%, 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.) The FCF for years 1-7 is $ million. (Round to three decimal places.) The FCF for year 8 is $ million. (Round to three decimal places.) b. If the cost of capital is 15%, what is the NPV of the project?
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:**Title: Feasibility Analysis of High-End Protein Bar Production Proposal**
**Introduction:**
Arnold Inc. is evaluating a project to produce high-quality protein bars intended for bodybuilders. The venture requires the use of an existing warehouse, purchased three years ago for $3 million and currently generating rental income of $119,000 annually. Anticipated rental rates are expected to remain unchanged in the foreseeable future. Aside from utilizing the warehouse, the project demands an upfront investment of $1.3 million in machinery and other equipment. This investment can be entirely depreciated using the straight-line method over the following decade for tax purposes. Additionally, Arnold Inc. plans to terminate the project after eight years, selling the equipment for $482,000.
Initial working capital equivalent to 10% of the forecasted first-year sales is also needed. The anticipated sales of the protein bars amount to $4.8 million in the inaugural year, maintaining this level for the remaining eight years. Manufacturing and operating expenses (excluding depreciation) will constitute 80% of the sales income. Moreover, the profits are taxable at a rate of 30%.
**Analysis Questions:**
### a. Free Cash Flows of the Project
**What are the free cash flows of the project?**
- **The FCF for year 0 is $______ million.** (Round to three decimal places)
- **The FCF for years 1-7 is $______ million.** (Round to three decimal places)
- **The FCF for year 8 is $______ million.** (Round to three decimal places)
### b. Net Present Value of the Project
**If the cost of capital is 15%, what is the NPV of the project?**
- **The NPV of the project is $______ million.** (Round to three decimal places)
**Interactive Component:**
Students are encouraged to calculate the free cash flows and the Net Present Value (NPV) on their own and input their values in the provided boxes.
This exercise helps in understanding the financial feasibility of long-term projects, encompassing aspects like capital investments, depreciation, working capital requirements, and the impact of operational costs and tax.
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