In the spring of 2015, Jemison Electric was considering
2-3) In the spring of 2015, Jemison Electric was considering an investment in a new distribution center. Jemison's CFO anticipates additional earnings before interest and taxes (EBIT) of $100,000 for the first year of operation of the center in 2011, and, over the next five years, the firm 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 five-year period toward a zero salvage value using straight-line depreciation of $80,000 per year. Jemison's CFO estimates that the distribution center will need operating net working capital equal to 20% of EBIT to support operation.
Assuming the firm faces a 30% tax rate; calculate the project's annual project freecash flow (FCF) for each of the next five years where the salvage value of operating networking capital and fixed assets is assumed to equal their book values respectively.
CT Computers corp. 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 estimates 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 five-year useful
life and will be depreciated using straight-line depreciation toward a zero
salvage value. CT estimates that in the first 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 flows? You can assume that the recycled PCs cost CT nothing.
b. Calculate the NPV and IRR for the recycling investment opportunity. Is the investment a good one based on these cash flow estimates?
c. Is the investment still a good one if only 75000 units are recycled in thefirst Year?
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?