- Problem 35 Marks The H2o Chemical Corp Is Considering A New Production Facility On A Plot Of Land That It Already Own 1 (131.25 KiB) Viewed 70 times
B. WHAT IS THE INITIAL CASH FLOW (i.e, total cash flow in year
0)
c.what is the present value of after tax net cash revenues?
d. what is the present value of total depreciation tax shield(
i.e PVCCATS)?
e. what is the present value of ending cash flows?
f. compute the NPV of the project. should H2O- Chemical Company
undertake the new project? why?
e. what can you infer about the project IRR (no computation
required)?
Problem (35 marks) The H2O-Chemical Corp. is considering a new production facility on a plot of land that it already owns and it is located near a residential area. The land has a current market value of $1 million and was acquired 4 years ago for $600,000. If this project of average risk is undertaken, new machinery worth $195,122 in real term must be purchased. A building must also be erected that costs $487,804.9 in real term. Both the new building and the machinery are eligible for capital cost allowances (CCA) on the declining balance at a rate of 15 percent. The new facility is expected to generate before tax net cash revenues of $250,000 per year for the next 10 years. The salvage value of the new machinery and the building at the end of 10 years is expected to be $80,000 and $70,000, respectively. Net working capital must be increased by $160,000 at the start of the project. If the land is not sold today, it will be sold in 10 years for an estimated amount of $1,600,000. The firm's regular marginal income tax rate is 40%. Any capital gains will be taxed at 50% of the firm's regular marginal income tax rate. Though the new project will reduce the local unemployment rate by 2%, the company needs permission from the majority (i.e. > 50%) of the local population to start the project as it has some potential, though limited, environment hazards in the long run. The permission is assessed following a survey of local residents. The result of the survey is expected later this afternoon. The total cost of the survey is estimated at $15,000 in real term, and it will be paid a year from now. The firm's current debt-to-equity ratio is 25%. The risk-free rate is 5%. The expected return on stock market index is 15%. The firm's stock price is perfectly correlated with market index. The firm has outstanding zero-coupon bonds with a current unit price of $291.36, will mature 8 years from now, and has a face value of $1,000. The expected inflation rate is 2.5%. a) What is the firm's weighted cost of capital (i.e. WACC)? b) What is the initial cash flow (i.e., total cash flow in year 0)?