XYZ Co. is looking at setting up a manufacturing plant overseas to produce a new line of tire. This will be a four-year project. The company bought some land three years ago for $4.9 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $6.4 million on an after-tax basis. In four years, the after-tax value of the land will be $7.8 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $78 million to build. The following market data on XYZ's securities are current:
Common stock: 6,300,000 shares outstanding, selling for $64 per share; the beta is 1.5 Market: 6% expected market risk premium; 3% risk-free rate Debt: All bonds are semi-annual bonds.
Bond Coupon Rate Price Quote Maturity 6.50 % 103.18 8 years 2 7.00 % 110.5 8 years
Face Value $ 35,000,000
45,000,000
3
7.50 %
109.85
15.5 years 25 years
50,000,000
4
6.70 %
102.75
75,000,000
XYZ's tax rate is 35%. The project requires $1,250,000 in initial net working capital investment to get operational. Assume XYZ raises all equity for new projects externally. c) The manufacturing plant belongs to CCA Class 43 (30%). At the end of the project (that is, the end of Year 5), the plant can be scrapped for $15.1 million. What is the PVCCATS of this plant and equipment? d) The company will incur $34,700,000 in annual fixed costs. The plan is to manufacture 105,000 pairs of tires per year and sell them at $1,650 per pair; the variable production costs are $800 per pair. What are the operating cash flows (OCF) of this project? e) Finally, XYZ's president wants you to throw all your calculations, assumptions, and everything else into the report for the chief financial officer; all he wants to know is what the tire project's internal rate of return (IRR) and net present value (NPV) are
