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




Question;1)In the spring of 2010, Jemison Electric was consideringan 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 thecenter in 2011, and, over the next?ve years, the?rm estimates that this amount willgrow at a rate of 5% per year. The distribution center will require an initial investmentof $400,000 that will be depreciated over a?ve-year period toward a zero salvage valueusing straight-line depreciation of $80,000 per year. Furthermore, Jemison expects toinvest 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 distributioncenter will need additional net working capital equal to 20% of new EBIT (i.e., thechange in EBIT from year to year).Assuming the?rm faces a 30% tax rate, calculate the project?s annual project freecash?ow (FCF) for each of the next?ve years.2)INTRODUCTORY PROJECT VALUATION CT Computers Inc. is considering whether tobegin offering customers the option to have their old personal computers recycledwhen 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 revenuesfrom 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. CTestimates that in the?rst year of the recycling investment, it could recycle 100,000 PCsand that this number will grow by 25% per year over the remaining four-year life of therecycling equipment. CT uses a 15% discount rate to analyze capital expenditures andpays taxes equal to 30%.a. What are the project cash?ows? You can assume that the recycled PCs cost CTnothing.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 disposeof the toxic elements from the recycled computers. What is your recommendationunder these circumstances?


Paper#52008 | Written in 18-Jul-2015

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