CARMMOBE is a firm that produces and sells cars and it is studying the possibility of extending its business opening a new plant. The plant would be constructed in a plot of land that the firm acquired 5 years ago at a cost of 4 million Euros. Today, the firm estimates that it could sell this property and obtain 5.1 million Euros (after taxes). In five years time, the firm could sell it at a price of 6 million Euros (after taxes). The construction of the plant requires an initial investment in fixed assets of 35 million Euros, and also an investment in working capital (basically to purchase inventories) of 1.3 million Euros. Working capital will be held constant and equal to 1.3 million Euros until the end of the project. 

The main characteristics of the project are as follows: 

•Time horizon: 5 years

 •Amortization plan for the plant: Linear amortization, 5 years, residual value is zero 

•New plant will produce 18,000 cars that will be sold at a price of 10,900€/unit 

•Variable costs are 9,400€/unit •If the firm undertakes the project, fixed costs would increase from 90 million Euros per year to 97 million Euros per year. 

•At the end of the project, the firm can sell all the inventories at their book value 

CARMMOBE is listed in the Stock Market, and we have the following information about their financing instruments: 

•Debt: the firm has issued 240,000 bonds with face value of 1,000€ that pay a 37.5€ coupon semi-annually. The maturity of the bonds is 20 years and their price is 94%. 

•Common Shares: 9 million shares with a face value of 20€ and market price of 71€ per share. Their beta is 1.2. 

•Preferred Shares: 400,000 shares that pay a fixed dividend of 5.5€ per year, and whose price is equal to 81€. 

We consider that the WACC is appropriate to discount the unlevered cash flows of the project because the capital structure of the firm does not change (project financed with the same proportions of debt/common shares/preferred shares). The risk-free rate of return is 5%, the risk premium is equal to 8% and the corporate tax rate is 35% Compute the NPV of the project. Should CARMMOBE undertake the project?

Answer rating: 100% (QA)

Here are the steps on how to calculate the NPV of the project Calculate the annual cash flows of the project This includes the revenues from the sale ... View the full answer