Alkaloid Technologies is a large technology firm that, after spending $40,000,000 on R&D over the last five years, has developed a new battery technology it calls PermaCharge.  This is a revolutionary product as it holds a charge 50 times longer than existing batteries currently used by consumer product companies.

 The new venture will last for an 8-year period.  To get production up and running will require a substantial investment in land, building, and equipment.  The VP of Operations believes it will cost Alkaloid $15,000,000 to acquire the land, $100,000,000 to build the new facility, and $55,000,000 for new equipment.  She further believes that Alkaloid will need an additional $40,000,000 in new net working capital.  Assets will depreciated over a 10-year period using straight-line depreciation.  NOTE:  Land is not depreciated.

The VP of Marketing believes that the firm can sell 10,000,000 units each year if priced at $50.00 per unit and will have variable costs of $40 per unit.  Fixed costs will be $30,000,000 each year.  This product will be so popular that it will reduce the sales of (i.e., cannibalize) its existing products by $5,000,000 each year (before-tax).

After the eighth year, a spate of “copycat” products that will commoditize the technology, thus limiting the profitability of the product.  At that point, the firm plans to exit the business.  The equipment can be sold for about $30,000,000 at the end of eight years.  The land and building will not be sold.

The company has a marginal tax rate of 25% and a weighted average cost of capital of 16%.

(a)  (5 Points) Calculate the initial cash flow of this project (i.e., the cash flows that occur in year 0). 

(b)  (5 Points) Calculate the operating cash flows for the project (i.e., years 1 through 8).  NOTE:  Land is NOT depreciated.   

(c)  (5 Points) Calculate the terminal cash flow (i.e., the cash flow associated with selling the assets and winding down net working capital).

(d)  (5 Points) Calculate the NPV of the project.

(e)  (5 Points) Suppose Alkaloid uses the following accelerated depreciation method:

Year	Depreciation Expense (% of asset’s cost)
1	50%
2	20%
3	15%
4	10%
5	5%
6	0%
7	0%
8	0%

       What is the NPV of the project using accelerated depreciation?  Why did the NPV increase with accelerated depreciation relative to straight-line?

Answer rating: 100% (QA)

Given Data land 15000000 building 100000000 useful life years 10 new equipment 55000000 useful life years 10 working capital 40000000 selling price per unit 50 variable cost per unit 40 fixed cost 300... View the full answer