Company B wants to enter the Lawnmower business. To enter the business, Company B will need to make an initial investment of $150 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a 10 year life and will be depreciated on a straight-line basis during that time, so that the book value of the production facilities and equipment equals zero at the end of year ten. Company B plans to operate the business only for six years, after which Pinder Ltd plans to sell its production facilities and equipment for $70 million. For the six years that Company B expects to operate in the lawnmower business, Company B expects to generate cash revenues of $150 million in the first year, which Company B expects to grow at a rate of 6% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 40% of revenues. Company B expects an increase in the net working capital of $26 million in year zero and a decrease in the net working capital of $26 million in year six when the business is sold. The corporate income tax rate is 42% and the discount rate is 10%. What is the NPV of the investment, based on the information above?
Company B wants to enter the Lawnmower business. To enter the business, Company B will need to make an initial investment of $150 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a 10 year life and will be depreciated on a straight-line basis during that time, so that the book value of the production facilities and equipment equals zero at the end of year ten. Company B plans to operate the business only for six years, after which Pinder Ltd plans to sell its production facilities and equipment for $70 million. For the six years that Company B expects to operate in the lawnmower business, Company B expects to generate cash revenues of $150 million in the first year, which Company B expects to grow at a rate of 6% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 40% of revenues. Company B expects an increase in the net working capital of $26 million in year zero and a decrease in the net working capital of $26 million in year six when the business is sold. The corporate income tax rate is 42% and the discount rate is 10%. What is the NPV of the investment, based on the information above?
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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Company B wants to enter the Lawnmower business. To enter the business, Company B will need to make an initial investment of $150 million into purchases of production facilities and equipment.
The production facilities and equipment are expected to have a 10 year life and will be depreciated on a straight-line basis during that time, so that the book value of the production facilities and equipment equals zero at the end of year ten.
Company B plans to operate the business only for six years, after which Pinder Ltd plans to sell its production facilities and equipment for $70 million.
For the six years that Company B expects to operate in the lawnmower business, Company B expects to generate cash revenues of $150 million in the first year, which Company B expects to grow at a rate of 6% each year after the first year.
The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 40% of revenues.
Company B expects an increase in the net working capital of $26 million in year zero and a decrease in the net working capital of $26 million in year six when the business is sold.
The corporate income tax rate is 42% and the discount rate is 10%. What is the NPV of the investment, based on the information above?
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