Maurice Tutor

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Category > Business & Finance Posted 12 May 2018 My Price 9.00

Scones and More Inc

Scones and More Inc. (SAM), is considering investing in a large baking facility. Capital expenditure today would be $20,000,000, which could be depreciated straight line over 5 years. New revenues and costs (both pretax) generated by the plant over the next 5 years would be (in millions):

Year

1

2

3

4

5

Revenues

$6

$6.5

$9.5

$11

$11.5

Costs

$2

$3

$3.4

$9.4

$11.4

The firm faces a tax rate of 35% and beyond year 5, assume that net cash flows will stay constant in perpetuity. Suppose the beta of this project is 1.1, the market risk premium is 3.7%, and the risk-free rate is 3.5%. SAM has current debt and equity values of $10 million and $70 million, respectively. This new project would allow financing of $5 million of risk-free debt (paying the risk-free rate) and $15 million of equity initially. At year 5, an additional $2 million of debt would be issued to pay some of that year’s costs, and debt would then be maintained at $12 million in perpetuity.

Perform an APV analysis of the project to determine its NPV

Answers

Maurice Tutor
(5)
Status NEW Posted 12 May 2018 08:05 PM My Price 9.00

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