Beats wants to build a new fac

Beats wants to build a new factory to produce its headphones. Itwill cost $230 million initially to build the factory over thecourse of 12 months, which will be worthless after 10 years. Thefactory will be depreciated linearly to $0 over 10 years. Beatsalready owns the land on which the factory will be built. The landis currently worth $10 million and was purchased for $2 millioneight years ago. After completion of the factory at the end of year1, Beats expects earnings before interest and taxes (EBIT) of $34million each year for 10 years. The company also has to addinventory (components) worth $13 million just before operationstarts at the end of the first year. Beat’s marginal tax rate is21% and its cost of capital is 6%.What is the free cash flow in year 0 (in $ million)?

What is the free cash flow in year 1 (in $ million)?

What is the annual depreciation in year 2 (in $ million)?

What is the free cash flow in year 2 (in $ million)?

What is the free cash flow in year 11 (in $ million)?

What is the NPV of this project (in $ million)?

Answer:

1.What is the free cash flow in year 0 (in $ million)?

Answer) Net Cash Out flow of 230 million

2.What is the free cash flow in year 1 (in $ million)?

Answer) Cash Inflow of $36.86 Million.

What is the annual depreciation in year 2 (in $ million)?

Answer) $230 Million/10 years = $23 Million.

What is the free cash flow in year 2 (in $ million)?

Answer) Cash Inflow of $49.86 Million.

What is the free cash flow in year 11 (in $ million)?

There will be no Cash flows at the end of 11thyear.

= (49.86/.06) x 0.943396

=

What is the NPV of this project (in $ million)?

Answer) NPV is $108.3 Million

Working Notes:

($ in Millions)

($ in Millions)
Particulars Year 0 Year 1 Year 2 Year 3 – 10 Total
Initial Investment -230.00
Earnings before Interest & Tax 34.00 34.00 34.00
Less:
Tax @21% 7.14 7.14 7.14
Earnings after Tax 26.86 26.86 26.86
ADD:
Depreciation 23.00 23.00 23.00
Capital Expenditure 13.00 0.00 0.00
Free cash Flows -230.00 36.86 49.86 49.86
[email protected] 6% 1.00 0.94 0.89 5.20
Net Cash flows/NPV of The Project -230.00 34.77 44.38 259.15 108.30

 
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