A 5-year project will require an investment of $100 million. This comprises of plant andmachinery worth $80 million and a net working capital of $20 million. The entire outlay willbe incurred at the project’s commencement.Financing for the project has been arranged as follows:80,000 new common shares are issued, the market price of which is $500 per share. Theseshares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%per year for an indefinite tenure.Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having aface value of $1,000. These bonds now have a market value of $1,150 each.At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the networking capital will be liquidated at its book value.The project is expected to increase revenues of the firm by $120 million per year. Expenses,other than depreciation, interest, and tax, will amount to $80 million per year. The firm is subject to a tax rate of 30%.Plant and machinery will be depreciated at the rate of 25% per year as per the written-down value method. You are required to: Compute the Terminal cash flow. Compute the FCF for years 1 through 5 Compute the project’s NPV and IRR
A 5-year project will require an investment of $100 million. This comprises of plant and
machinery worth $80 million and a net working capital of $20 million. The entire outlay will
be incurred at the project’s commencement.
Financing for the project has been arranged as follows:
80,000 new common shares are issued, the market price of which is $500 per share. These
shares will offer a dividend of $4 per share in year 1, which is expected to grow at a rate of 9%
per year for an indefinite tenure.
Remaining funds are borrowed by issuing 5-year, 9% semi-annual bonds, each bond having a
face value of $1,000. These bonds now have a market value of $1,150 each.
At the end of 5 years, fixed assets will fetch a net salvage value of $30 million, whereas the net
working capital will be liquidated at its book value.
The project is expected to increase revenues of the firm by $120 million per year. Expenses,
other than depreciation, interest, and tax, will amount to $80 million per year. The firm is subject to a tax rate of 30%.
Plant and machinery will be
- Compute the Terminal cash flow.
- Compute the FCF for years 1 through 5
- Compute the project’s
NPV andIRR
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