BUSFIN1316
December 2023
SYNOPSIS:
You are asked to conduct the analysis necessary to evaluate the proposed investment in the Collinsville plant and the related investment in laminate technology. A discount rate is needed, and the discount rate must be appropriate for the risk level inherent in the project’s cash flows. This involves determining the appropriate risk-adjusted COST OF EQUITY, the COST OF DEBT, and the DEBT and EQUITY WEIGHTS to be used in estimating a WACC. INCREMENTAL CASH FLOWS must be estimated for the Collinsville plant without the laminate technology and for the incremental investment in the laminate technology. NET PRESENT VALUES must be calculated to assess the economic value of these proposed investments.
Additional Assumptions for the Case:
a. Assume market risk premium (Rm-Rf) is equal to 7%
1.
(40 points) Estimate the cost of equity appropriate for the risk level of the cash flows to be discounted. Please use the data provided only in the case to estimate the effective tax rate. Please indicate either here, below, or in the Excel file your assumptions and your justifications for your choices of inputs that were used to calculate WACC.
2. (10 points) Estimate the appropriate cost of debt.
3. (10 points) Estimate the WACC appropriate for the Collinsville NPV analysis.
4. (55 Points) Calculate the incremental free cash flows (to firm) for the Collinsville plant exclusive of the investment in laminate technology. Use data from Exhibit 8 to calculate cash flows for the first five years. Since the physical life of the plant is 10 years, employ steady-state assumptions to produce cash flows for the last 5 years, 1985-1989. Because of the looming prospects of superior technology (metal electrodes), the terminal value assumption for the end of 1989 should reflect a salvage market value of zero for the plant and 100% recovery for the working capital. Please indicate either here, below, or in the Excel file your assumptions and references in the case that were used to project cash flows.
Note: working capital in any year = Accounts receivable +Inventory –Accounts Payable
Capital Expenditure in any year=netPPE (end of the year)-netPPE (beginning of the year) + Depreciation (year)
5. (10 points) Estimate the Net Present Value of the Collinsville Plant Acquisition before investment in Laminate Technology.
6. (50 points) Estimate Net Present Value at December 31, 1979, of $2.25Million Investment in Laminate Technology at Collinsville plant. Assume that a $2.25 Million investment was to be made on December 31, 1980. Also, assume that Laminate technology investment (together with the plant) is going to be scrapped at the end of 1989 at zero salvage value. Assume straight-line depreciation for Laminate Technology Investment. Please indicate either here, below, or in the Excel file your assumptions and references from the case that were used to project cash flows in Laminate Technology for 10 years, in particular the last 5 years.
7. (10 points) Provide the final calculation of the Total net present value of Investment in Collinsville Plant and Laminate Technology.
8. (15 points). Please comment on the purchasing price of $12 Million, asked for the Collinsville Plant by American Chemical considering your NPV analysis and current and future developments in the sodium chloride business.