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##### In the spring of 2010, Jemison Electric was considering an investment in a new distribution center

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**Question**

1)In the spring of 2010, Jemison Electric was considering;an investment in a new distribution center. Jemison?s CFO anticipates additional earn-;ings before interest and taxes (EBIT) of $100,000 for the?rst year of operation of the;center in 2011, and, over the next?ve years, the?rm estimates that this amount will;grow at a rate of 5% per year. The distribution center will require an initial investment;of $400,000 that will be depreciated over a?ve-year period toward a zero salvage value;using straight-line depreciation of $80,000 per year. Furthermore, Jemison expects to;invest an amount equal to the?rm?s annual depreciation expense to maintain the physi-;cal plant. These additional capital expenditures will also be depreciated over a period of;?ve years toward a zero salvage value. Jemison?s CFO estimates that the distribution;center will need additional net working capital equal to 20% of new EBIT (i.e., the;change in EBIT from year to year).;Assuming the?rm faces a 30% tax rate, calculate the project?s annual project free;cash?ow (FCF) for each of the next?ve years.;2)INTRODUCTORY PROJECT VALUATION CT Computers Inc. is considering whether to;begin offering customers the option to have their old personal computers recycled;when they purchase new systems. The recycling system would require CT to invest;$600,000 in the grinders and magnets used in the recycling process. The company esti-;mates that for each system it recycles, it would generate $1.50 in incremental revenues;from the sale of scrap metal and plastics. The machinery has a?ve-year useful life andwill be depreciated using straight-line depreciation toward a zero salvage value. CT;estimates that in the?rst year of the recycling investment, it could recycle 100,000 PCs;and that this number will grow by 25% per year over the remaining four-year life of the;recycling equipment. CT uses a 15% discount rate to analyze capital expenditures and;pays taxes equal to 30%.;a. What are the project cash?ows? You can assume that the recycled PCs cost CT;nothing.;b. Calculate the NPV and IRR for the recycling investment opportunity. Is the invest-;ment a good one based on these cash?ow estimates?;c. Is the investment still a good one if the Year 1 units recycled are only 75,000?;d. Redo your analysis for a scenario in which CT incurs a cost of $0.20 per unit to dispose;of the toxic elements from the recycled computers. What is your recommendation;under these circumstances?

Paper#18939 | Written in 18-Jul-2015

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