Amalfi is considering investing in a new project. The project will generate revenues of $30 million...

Transcribed Image Text:

Amalfi is considering investing in a new project. The project will generate revenues of $30 million in its first year of operation, and these revenues will grow at the rate of 8% per year thereafter. The project also entails R&D expenditures of $14 million in the first year of operation and these expenditures are expected to grow at the rate of 11% per year. If the company decides to undertake the project now, it will become operational next year. The CFO recommends that the project be undertaken, but that it be pursued only as long as it yields a positive net cash flow. That is, it will be terminated when R&D expenditures are larger than revenues. The weighted average cost of capital is 11%. The firm must invest $150 million up front, and also disburse $40 million for clean-up costs during the last year of the project. If undertaken, the project will be pursued for years, will have a net present value of and the firm will a) 41 years; $5.486 million; invest b) 21 years; -$4.312 million; not invest c) 28 years; $14.685 million; invest d) 48 years; -$14.354 million; not invest e) 46 years; $2.126 million; invest Orion, a mining company in Canada, is considering a mining project that will have an initial cost of $25 million and generate revenues of $18 million per year for three years. During the fourth year, the mine will be shut down and there will be substantial clean-up costs to restore the land to its original state, (a process that will be completed during the fourth year.) Orion is also considering an alternative mining project which will cost $12 million and generate revenues of $6 million per year for four years but which does not involve clean-up costs. Orion's weighted average cost of capital is 12%. What must be the clean-up costs on the first project for Orion to be indifferent between the two projects? a) $24.1 million b) $18.26 million c) $12 million d) $15.6 million e) $17.12 million MedCom, a medical equipment producer is currently looking into acquiring Alto, which also produces medical equipment and is one of its closest competitors. Alto has a book value of debt of $100 million selling at 85% of par value, book equity of $90 million, 150 million shares selling at $5 per share, and $300 million in cash. Meccom will need to issue new debt and equity to finance the acquisition and MedCom estimates that the issuance costs of new debt and equity will be $10 million. Since MedCom will still maintain the same debt to equity ratio as before and since MedCom and Alto have the same beta, its weighted average cost of capital (WACC) will remain at 12% If the acquisition goes through this year, it will generate a free cash flow of $30 million next year, i.e., in its first year of operation. This cash flow is expected to grow at an annual rate of 15% for 5 years and then grow at a lower rate of 5% forever. What is the net present value of this acquisition project for MedCom? (Hint: Start by calculating the total acquisition cost in year 0 of the project.) Draw the time-lines. a) $79.344 million b) $114.370 million c) $42.88 million d) $170.50 million e) $134.76 million Amalfi is considering investing in a new project. The project will generate revenues of $30 million in its first year of operation, and these revenues will grow at the rate of 8% per year thereafter. The project also entails R&D expenditures of $14 million in the first year of operation and these expenditures are expected to grow at the rate of 11% per year. If the company decides to undertake the project now, it will become operational next year. The CFO recommends that the project be undertaken, but that it be pursued only as long as it yields a positive net cash flow. That is, it will be terminated when R&D expenditures are larger than revenues. The weighted average cost of capital is 11%. The firm must invest $150 million up front, and also disburse $40 million for clean-up costs during the last year of the project. If undertaken, the project will be pursued for years, will have a net present value of and the firm will a) 41 years; $5.486 million; invest b) 21 years; -$4.312 million; not invest c) 28 years; $14.685 million; invest d) 48 years; -$14.354 million; not invest e) 46 years; $2.126 million; invest Orion, a mining company in Canada, is considering a mining project that will have an initial cost of $25 million and generate revenues of $18 million per year for three years. During the fourth year, the mine will be shut down and there will be substantial clean-up costs to restore the land to its original state, (a process that will be completed during the fourth year.) Orion is also considering an alternative mining project which will cost $12 million and generate revenues of $6 million per year for four years but which does not involve clean-up costs. Orion's weighted average cost of capital is 12%. What must be the clean-up costs on the first project for Orion to be indifferent between the two projects? a) $24.1 million b) $18.26 million c) $12 million d) $15.6 million e) $17.12 million MedCom, a medical equipment producer is currently looking into acquiring Alto, which also produces medical equipment and is one of its closest competitors. Alto has a book value of debt of $100 million selling at 85% of par value, book equity of $90 million, 150 million shares selling at $5 per share, and $300 million in cash. Meccom will need to issue new debt and equity to finance the acquisition and MedCom estimates that the issuance costs of new debt and equity will be $10 million. Since MedCom will still maintain the same debt to equity ratio as before and since MedCom and Alto have the same beta, its weighted average cost of capital (WACC) will remain at 12% If the acquisition goes through this year, it will generate a free cash flow of $30 million next year, i.e., in its first year of operation. This cash flow is expected to grow at an annual rate of 15% for 5 years and then grow at a lower rate of 5% forever. What is the net present value of this acquisition project for MedCom? (Hint: Start by calculating the total acquisition cost in year 0 of the project.) Draw the time-lines. a) $79.344 million b) $114.370 million c) $42.88 million d) $170.50 million e) $134.76 million