Caterpillar Inc. is the world's largest construction equipment manufacturer. In 2019, it ranked 58 on the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Caterpillar Inc. is the world's largest construction equipment manufacturer. In 2019, it ranked 58 on the Fortune 500 list. This year, Caterpillar's CEO, D. James Umpleby III is considering launching a new model of articulated truck to meet the increasing demand driven by the infrastructure investment by the government. After intensive research by the operational and marketing teams, the following projections are made: (1) The necessary facility (plants and equipment) costs 560 million. After the facility is ready, Caterpillar Inc. can produce and sell the new model of articulated truck over the subsequent three consecutive years. The 560 million cost will be depreciated using straight-line depreciation over the three years of production. (2) After the three years' operation, the facility is expected to have 50 ending book value but $20 million of market salvage value. (3) Caterpillar Inc. forecasts that it can produce and sell 400 trucks per year at $0.5 million per truck. The fixed cost will be $40 million per year and the variable cost will be 0.2 million per track. (4) The production requires a constant $10 million of net working capital every year. (5) The tax rate is 40%. (6) According to the estimated risk of the project, investors require a 10% return on this project. Please answer the following questions based on the information above: a. (2 Points) If this new project is approved, the production and sales will start in July of this year and last for three years. What is the EBIT per year? b. (2 Points) What is the after-tax market salvage value of the facility? c. (6 Points) Calculate the cash flows on this project and show them in the following timeline table. Operating Cash Flow Cash flows related with Net Capital Spending Cash flows related with Changes in Net Working Capital July 2020 July July July 2021 2022 2023 d. (2 Points) D. James Umpleby III would like to first conduct some basic project evaluation. What is the principal technique that he should use? Under this principal technique, should Caterpillar take this project? e. (3 points) What is the level of variable cost to achieve financial break even? (Hint: financial break-even is zero NPV. Note that you should not ignore taxes.) f. (3 points) Suppose the company needs to finance the project with external capital. The company's target D/E is 0.6. The flotation cost of debt is 3% and flotation cost of equity is 7%. The company will issue bonds to raise the necessary capital this time. How to adjust NPV of the project after considering the flotation cost? Still assume the variable cost per truck is 0.2 million per truck. g. (4 points) The firm's COO recently informed the CEO that one of its divisions has just completed their project and will no longer use a current plant, which might be suitable for the new project. The existing plant was acquired to support the earlier project at a cost of $50 million a few years ago and it has been fully depreciated. Since the previous project was already completed, this existing plant could be sold now at $25 million. To refit the plant for the current project, the firm needs to spend $39 million to remodel and upgrade equipment. The plant can be completely fitted by the time the new project starts. The upgrading part could be depreciated straight line to zero over 3 year. This updated plant could also be sold for $20 million at the end of the project. What would be the NPV if the firm decides to make use of the existing plant instead of buying a new one? Which proposal is better? Still assume the variable cost per truck is 0.2 million per truck and the project is financed with internal funds. Caterpillar Inc. is the world's largest construction equipment manufacturer. In 2019, it ranked 58 on the Fortune 500 list. This year, Caterpillar's CEO, D. James Umpleby III is considering launching a new model of articulated truck to meet the increasing demand driven by the infrastructure investment by the government. After intensive research by the operational and marketing teams, the following projections are made: (1) The necessary facility (plants and equipment) costs 560 million. After the facility is ready, Caterpillar Inc. can produce and sell the new model of articulated truck over the subsequent three consecutive years. The 560 million cost will be depreciated using straight-line depreciation over the three years of production. (2) After the three years' operation, the facility is expected to have 50 ending book value but $20 million of market salvage value. (3) Caterpillar Inc. forecasts that it can produce and sell 400 trucks per year at $0.5 million per truck. The fixed cost will be $40 million per year and the variable cost will be 0.2 million per track. (4) The production requires a constant $10 million of net working capital every year. (5) The tax rate is 40%. (6) According to the estimated risk of the project, investors require a 10% return on this project. Please answer the following questions based on the information above: a. (2 Points) If this new project is approved, the production and sales will start in July of this year and last for three years. What is the EBIT per year? b. (2 Points) What is the after-tax market salvage value of the facility? c. (6 Points) Calculate the cash flows on this project and show them in the following timeline table. Operating Cash Flow Cash flows related with Net Capital Spending Cash flows related with Changes in Net Working Capital July 2020 July July July 2021 2022 2023 d. (2 Points) D. James Umpleby III would like to first conduct some basic project evaluation. What is the principal technique that he should use? Under this principal technique, should Caterpillar take this project? e. (3 points) What is the level of variable cost to achieve financial break even? (Hint: financial break-even is zero NPV. Note that you should not ignore taxes.) f. (3 points) Suppose the company needs to finance the project with external capital. The company's target D/E is 0.6. The flotation cost of debt is 3% and flotation cost of equity is 7%. The company will issue bonds to raise the necessary capital this time. How to adjust NPV of the project after considering the flotation cost? Still assume the variable cost per truck is 0.2 million per truck. g. (4 points) The firm's COO recently informed the CEO that one of its divisions has just completed their project and will no longer use a current plant, which might be suitable for the new project. The existing plant was acquired to support the earlier project at a cost of $50 million a few years ago and it has been fully depreciated. Since the previous project was already completed, this existing plant could be sold now at $25 million. To refit the plant for the current project, the firm needs to spend $39 million to remodel and upgrade equipment. The plant can be completely fitted by the time the new project starts. The upgrading part could be depreciated straight line to zero over 3 year. This updated plant could also be sold for $20 million at the end of the project. What would be the NPV if the firm decides to make use of the existing plant instead of buying a new one? Which proposal is better? Still assume the variable cost per truck is 0.2 million per truck and the project is financed with internal funds.
Expert Answer:
Answer rating: 100% (QA)
a To calculate the EBIT Earnings Before Interest and Taxes per year we need to consider the revenue fixed costs and variable costs Revenue per year 400 trucksyear 505 milliontruck 202 billion Fixed co... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Cuppa Inc. operates a chain of doughnut shops. The company is considering two possible expansion plans Plan A would open eight smaller shops at a cost of $8,940,000 Expected annual net cash inflows...
-
CirctBat Ltd produces high standard cricket bat in Australia and exports them to India.It also has an ongoing joint venture with an Indian firm that produces some sporting goods for a fee.CricBat is...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Mike has the following monthly information: Salary $4,000 Rent 1,800 700 Car payment Investment Income 200 Meals 900 Groceries 700 Student Loan Payment 400 Other Expenses 600 1. What is Mike's...
-
ALLOCATING OPERATING EXPENSEPURCHASE ORDERS The purchasing department of Brindley Company performs the purchasing function for the entire business. The numbers of purchase orders processed during the...
-
Show that, quite generally, the low-temperature behavior of the chemical potential, the specific heat, and the entropy of an ideal Fermi gas are given by \[\mu \simeq...
-
A pair of random variables has the circular normal distribution if their joint density is given by \[\begin{aligned}& f\left(x_{1}, x_{2} ight) \\& \quad=\frac{1}{2 \pi \sigma^{2}}...
-
1. Dogswells marketing plans were ambitious, but were not working. What is their primary problem? 2. Would money from the new investors solve the problem? What other options do they have? Some small...
-
On June 1, Blue Spruce Corp. Ltd. borrows $76,500 from Acme Bank on a 6-month, $76,500, 8% note. The note matures on December 1. (a) Prepare the entry on June 1. (Credit account titles are...
-
In 2005, Bob Moyer was reviewing production costs for Mile High Cycles. Located in Denver, Colorado, the company sold very high-quality, handcrafted mountain bikes to bicycle retailers throughout the...
-
We can magnify objects using a simple magnifying glass, that is, a single converging lens. What advantage is gained by adding a second lens (the objective lens) to the simple magnifier (the eyepiece)...
-
ACTIVITY 7 After You Read: Plot Structure afnomel otein :bo UOY 19fA The plot is the most important aspect of the Concrete Level. Plot describes the sequence of events in a storythat is, what happens...
-
How does mitochondrial dynamics, encompassing the processes of fusion and fission, contribute to cellular homeostasis, and what are the consequences of dysregulated mitochondrial morphology for...
-
Address the following questions: When should one be citing information? What does it mean to be "common knowledge?" How has the Internet made plagiarism issues worse? Why? What are some ways in which...
-
A proton with an initial speed of 900,000 m/s brought to rest by an electric field. a. What was the potential difference that stopped the proton? b. What was the initial kinetic energy of the proton,...
-
s la la O e EX ec ec sta da da Data table (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Year 2019 2020 2021 2022 Asset F 15% 16% 17% 18% Print...
-
Suppose we are given the following yield curve (assume the rates are expressed in semi-annual compounding.) Term (months) rate 4.0% 5.0% 5.5% 6.0% 6 12 18 24 (a) Find the price of a 2-year 6% coupon...
-
CdF2 (s) Cd+ (aq) + 2 F- (aq) 1. A saturated solution of CdF2 is prepared. The equilibrium in the solution is represented above. In the solution [Cd+] eq = 0.0585 M and [F-] eq = 0.117 M. a....
-
Michael Woodford became the first foreign-born chief executive of a Nikkei 2252 firm when he was appointed Olympus's CEO. Being selected as Olympus's CEO was the culmination of the British citizen's...
-
By 2010, Ernst & Young (EY; E&Y) had served as the independent audit firm for Universal American Corporation for 15 years. Universal, a large healthcare services company headquartered in affluent...
-
Thursday, October 24, 1929, easily ranks as the most dramatic day that Wall Street has ever seen.1 That day witnessed the beginning of the Great Stock Market Crash that over the following few years...
-
A thermos flask is an example of isolated system. State True (T) or False (F)
-
In a closed system, mass does not remain constant. State True (T) or False (F)
-
In a reversible process, initial and final states of the system are same. State True (T) or False (F)
Study smarter with the SolutionInn App