Problem Set 12 Checkpoints

Problem Set 12 Checkpoints - ovens per year at full...

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BusM 401 Problem Set #12 Advanced Valuation Techniques Checkpoints 1. You are valuing STU Corporation’s Alpha project using the APV method. You already found the present value of free cash flows from the project (discounted at the appropriate cost of equity) to be $500,000. The only important side effect of financing is the present value of debt tax shields. The Alpha project can support a constant $1 million in debt over the life of the project, which is 3 years. STU Corp’s tax rate is 50%, and the current interest rate applicable for the project’s debt is 10% (assume this rate is also appropriate for discounting the tax shields). What is the APV of the Alpha project? (Assume tax shields are realized at the end of each year.) APV=624,343 2. a. GHI Corporation is considering building a new plant to produce halogen-lamp ovens. GHI has a choice between two plant designs. The small design costs $20 million to build, requires $1 million in fixed annual operating expense, and can produce 40,000
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Unformatted text preview: ovens per year at full capacity. The large design costs $32.5 million to build, requires $2 million in fixed annual operating expense, and can produce 80,000 ovens per year at full capacity. Both plant designs would be expected to have a life of 10 years. GHI expects to be able to sell up to 60,000 ovens per year at a per-unit after-tax cash flow of $120. Which plant design (if any) should GHI implement? (Assume a discount rate of 12%, and keep the problem simple by ignoring depreciation, terminal cash flows, and changes in NWC.) Small: NPV=1,470,848 Large: b. Suppose further that GHI believes that there is a 50/50 chance that in 5 years Congress will pass legislation limiting the use of microwave ovens for federal government purposes. GHI believes that if this legislation is passed, they will be able to sell 80,000 ovens per year in years 6 through 10. Now which plant design (if any) should GHI implement? 3. Do Higgins, Chapter 8, #9. Answers provided in back of book. 2...
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This note was uploaded on 03/06/2012 for the course BUS M 410 taught by Professor Brianboyer during the Fall '10 term at BYU.

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Problem Set 12 Checkpoints - ovens per year at full...

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