AMG Enterprises is interested in investing in a scale-expanding project.
It spent $1 billion last year doing research about this project and has found out the following.
-The project will require a $10 billion upfront investment in fixed capital, which will be straleht-line
depreciated to $0 over 10 years. This capital has a salvage value at the end of year 10 of $2 billion.
-The project will generate $3 billion in new sales each year, with associated annual fued costs of 50.5
billion and annual variable costs of $1 billion.
-The project also requires an upfront investment in inventory of $2 billion, which an be fully
recouped at the end of year 10.

-The firm pays a 21% corporate tax rate and the firm's WACC is 10%.

Q1. What is the after-tax cash flow from capital at the end of year 10?

Q2.What are the annual operating cash flows (CF) from this project?

Q3.Suppose that AMG calculates that the present value of all future free cash flows from the project,not including upfront investment, is approximately $10 billion. What is the Net Present Value (NPV)from investing in the project and should AMG invest in the project?

Answer rating: 100% (QA)

Q1 The book value of the fixed capital at the end of year 10 and the salvage value must be calculated in order to determine the aftertax cash flow from capital The aftertax cash flow from capital is t... View the full answer