# 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)?

 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)?

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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