question archive You are considering building a factory
You are considering building a factory
Subject:FinancePrice: Bought3
You are considering building a factory. The initial cost to build
the factory is $3 billion, the factory will last 5 years and have a salvage value of $1 billion. You plan to use straight line depreciation and depreciate the factory to a book value of $0.4 billion. Sales from the factory are expected to be 2 billion each year for the next 5 years and costs (other than depreciation) are 60% of revenues. Additional capital expenditures of $100 million will be required at the end of each of for the next 5-years (i.e., at t=1,2,3,4 and 5). Inventories and A/P will immediately rise by $500 million and $100 million respectively and remain at these levels until returning to back to original levels at the end of the project (t=5). A/R will rise by $400 million after the 1st year (i.e., at t=1) and remain at that level until falling back to original levels at the end of the project's life (t=5). If the WACC for the project is 15%, the marginal tax rate is 40% and the capital gains tax rate is 40%.
What is the projects NPV?
-It turns out that you are using an existing structure that you built 5 years ago for $550 million. In addition, you can rent the buildin
