Lululemon wants to enter the electric car business. To enter the business, Lululemon will need to make an initial investment of $100 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a ten-year life and will be depreciated on a straight-line basis over that period, so that the book value of the production facilities and equipment equals zero at the end of year ten. Lululemon plans to operate the business only for six years, after which Lululemon plans to sell its production facilities and equipment for $60 million. For the six years that Lululemon expects to operate in the electric car business,Lululemon expects to generate cash revenues of $140 million in the first year, which Lululemon expects to grow at a rate of 5% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 35% of revenues. Lululemon expects an increase in the net working capital of $20 million in year zero and a decrease in the net working capital of $20 million in year six when the business is sold. The corporate income tax rate is 40% and the discount rate is 10%. What is the NPV of the investment, based on the information above? (Round to the nearest two digits)
Lululemon wants to enter the electric car business. To enter the business, Lululemon will need to make an initial investment of $100 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a ten-year life and will be depreciated on a straight-line basis over that period, so that the book value of the production facilities and equipment equals zero at the end of year ten. Lululemon plans to operate the business only for six years, after which Lululemon plans to sell its production facilities and equipment for $60 million. For the six years that Lululemon expects to operate in the electric car business,Lululemon expects to generate cash revenues of $140 million in the first year, which Lululemon expects to grow at a rate of 5% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 35% of revenues. Lululemon expects an increase in the net working capital of $20 million in year zero and a decrease in the net working capital of $20 million in year six when the business is sold. The corporate income tax rate is 40% and the discount rate is 10%. What is the NPV of the investment, based on the information above? (Round to the nearest two digits)
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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Lululemon wants to enter the electric car business. To enter the business, Lululemon will need to make an initial investment of $100 million into purchases of production facilities and equipment. The production facilities and equipment are expected to have a ten-year life and will be depreciated on a straight-line basis over that period, so that the book value of the production facilities and equipment equals zero at the end of year ten. Lululemon plans to operate the business only for six years, after which Lululemon plans to sell its production facilities and equipment for $60 million. For the six years that Lululemon expects to operate in the electric car business,Lululemon expects to generate cash revenues of $140 million in the first year, which Lululemon expects to grow at a rate of 5% each year after the first year. The cash operating costs of running the electric car business, excluding depreciation expenses, are expected to be 35% of revenues. Lululemon expects an increase in the net working capital of $20 million in year zero and a decrease in the net working capital of $20 million in year six when the business is sold. The corporate income tax rate is 40% and the discount rate is 10%. What is the NPV of the investment, based on the information above? (Round to the nearest two digits)
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