n additional equipment (AE) costing$3,500,000 will be needed at the end of year 3. At the end of seven(7) years, the original equipment, IE, will have no resale value butthe supplementary equipment, AE, can be sold for $50,000. A workingcapital of $1,350,000 will be needed.The project is forecast to generate sales of agri-products over theseven years as follows:Year 1 70,000 unitsYear 2 100,000 unitsYears 3-5 250,000 unitsYears 6-7 325,000 unitsA sale price of $150 per unit for the first two years is expected andthen decline to $90 per unit thereafter as the newness of the productloses some sheen. The variable expenses will amount to 30% of salesrevenue. Fixed cash operating expenses will amount to $1,100,000 peryear.The company falls in the 25% tax category for ordinary income and 40%tax category for capital gain.The initial equipment is depreciated as per the 7-year MACRS systemand the additional equipment is depreciated on a straight-line basis.In the event of a negative taxable income, the tax is computed asusual and is reported as a negative number, indicating a reduction inloss after tax.The initial financing of the project will be carried out as follows:-55% equity and 45% debt. The company paid $1.50 per share in the formof dividend this year, which is likely to increase at a rate of 3%per year for the near future. The current price of the company’s stockis $9.50 per share. The bank loan is likely to be arranged at aninterest rate of 13.5% p.a. Compute FCF for years 1 through 7. Compute the NPV and IRR.
n additional equipment (AE) costing
$3,500,000 will be needed at the end of year 3. At the end of seven
(7) years, the original equipment, IE, will have no resale value but
the supplementary equipment, AE, can be sold for $50,000. A working
capital of $1,350,000 will be needed.
The project is forecast to generate sales of agri-products over the
seven years as follows:
Year 1 70,000 units
Year 2 100,000 units
Years 3-5 250,000 units
Years 6-7 325,000 units
A sale price of $150 per unit for the first two years is expected and
then decline to $90 per unit thereafter as the newness of the product
loses some sheen. The variable expenses will amount to 30% of sales
revenue. Fixed cash operating expenses will amount to $1,100,000 per
year.
The company falls in the 25% tax category for ordinary income and 40%
tax category for capital gain.
The initial equipment is
and the additional equipment is depreciated on a straight-line basis.
In the event of a negative taxable income, the tax is computed as
usual and is reported as a negative number, indicating a reduction in
loss after tax.
The initial financing of the project will be carried out as follows:-
55% equity and 45% debt. The company paid $1.50 per share in the form
of dividend this year, which is likely to increase at a rate of 3%
per year for the near future. The current price of the company’s stock
is $9.50 per share. The bank loan is likely to be arranged at an
interest rate of 13.5% p.a. Compute FCF for years 1 through 7. Compute the NPV and IRR.
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