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Capital Budgeting Analysis (6 questions: lpes) An Italian company is considering expanding the sales or its cappucciso machines to the U.S. market. As a result, the idea of a setting up a manufacturing facility in the U.S. should be explored. The company estimate the initial demand in U.S. will bring in an amal operating profit or $2.500,000, which is expected to keep track with the U.S. price level. The nuw facility will free up the amount creatly exported to the U.S. market. The company presently realizes an annual operating profit of 1,000,000 on is U.S. export, which keeps track with the price level in Italy The manufacturing facility is expected to cost $24 million. The company plans to finance the project with a combination of debt and equity capital. The new project will increase the company's borrowing capacity by 10 million, and the company plans to borrow only that amount. The city in which the facility will be built has promised to provide a 5-year loan of 7.5 million at 6% per annum. The U.S. IRS allows the company to straight-line depreciate the new facility over a 5-year period. After that time, the company plans to terminate the project and sell all molding equipment, which accounts for 50% of the project's cost. The company estimates that the after- tax salvage value of molding equipment will be no more than 25% of its original book value. Corporate tax rates in the U.S. and Italy are the same as 35%. The long-term inflation rate is expected to be 3% in the U.S. and 5% in Italy. The current spot exchange rate is $1.5/. The Italian company explicitly believes in PPP as the best means to forecast future exchange rate. The company's U.S. sales affiliate currently holds $1.5 million ready for repatriation back to Italy. The money was accumulated under a e left 1:26:26 fession rate of 25%. If the fund were repatriated, additional tax will be due. 32A fax salvage value of molding equipment will be no more than 25 of its original book value Corporate tax rates in the U.S. and Italy are the same as 35%. The long-term inflation rate is expected to be in the US and in italy The current pot exchange rate is SI SE. The Italian company explicitly believes in PPP as the best means to forecast we exchange The company U.S. sales aliate currently holds 1.5 million ready for repatriation back to Italy. The money was wecumulated under a special tax concession rate of 25%. If the fund were repatriated, additional tax will be due. The company's weighted average cost of capital is 11%, cost of dollar borrowing is 9%, cost of Euro borrowing is 10%, and cost of equity is 18%. The all-equity Euro cost of capital is 15%. Times New 5 (Epe) Paragraph SEBU (1) Specify the discount rates for the calculation of the present value (PV) of after-tax operating cash flow, the PV of depreciation tax shield, and the PV of the salvage value of molding equipment (2) Discuss the financing of the project, including the amount of borrowing and borrowing cost. eft 1:26:17 The company's U.S. sales affiliate currently holds $1.5 million ready for repatriation back to Italy. The money was accumulated under special tax concession rate of 25%. If the fand were repatriated, additional tax will be due. The company's weighted average cost of capital is 11%, cost of dollar borrowing is 9% cost of Euro borrowing is 10%, and cost of is 18%. The all-equity Euro cost of capital is 15%. Pagraph Times New R 5 (1) EEB (3) Calculate the benefit of using concessionary loan. Time left 1:25:52 Paragraph Times New R S (18) SEEB (4) Calculate the amount of fund that will be freed up by the new project. (5) Assume the preliminary estimate of the 5-year project's APV is - 1,500,000, excluding the salvage value of molding equipment. What is the break-even salvage value of molding equipment? (hint: break-even salvage value is the salvage value at which the project's APV equals zero) 6) How much of the interest payment should be used to calculate interest tax shield, if the concessionary loan offered by the host city is $20 million? Write your answer as %. ft 1:24:57 Capital Budgeting Analysis (6 questions: lpes) An Italian company is considering expanding the sales or its cappucciso machines to the U.S. market. As a result, the idea of a setting up a manufacturing facility in the U.S. should be explored. The company estimate the initial demand in U.S. will bring in an amal operating profit or $2.500,000, which is expected to keep track with the U.S. price level. The nuw facility will free up the amount creatly exported to the U.S. market. The company presently realizes an annual operating profit of 1,000,000 on is U.S. export, which keeps track with the price level in Italy The manufacturing facility is expected to cost $24 million. The company plans to finance the project with a combination of debt and equity capital. The new project will increase the company's borrowing capacity by 10 million, and the company plans to borrow only that amount. The city in which the facility will be built has promised to provide a 5-year loan of 7.5 million at 6% per annum. The U.S. IRS allows the company to straight-line depreciate the new facility over a 5-year period. After that time, the company plans to terminate the project and sell all molding equipment, which accounts for 50% of the project's cost. The company estimates that the after- tax salvage value of molding equipment will be no more than 25% of its original book value. Corporate tax rates in the U.S. and Italy are the same as 35%. The long-term inflation rate is expected to be 3% in the U.S. and 5% in Italy. The current spot exchange rate is $1.5/. The Italian company explicitly believes in PPP as the best means to forecast future exchange rate. The company's U.S. sales affiliate currently holds $1.5 million ready for repatriation back to Italy. The money was accumulated under a e left 1:26:26 fession rate of 25%. If the fund were repatriated, additional tax will be due. 32A fax salvage value of molding equipment will be no more than 25 of its original book value Corporate tax rates in the U.S. and Italy are the same as 35%. The long-term inflation rate is expected to be in the US and in italy The current pot exchange rate is SI SE. The Italian company explicitly believes in PPP as the best means to forecast we exchange The company U.S. sales aliate currently holds 1.5 million ready for repatriation back to Italy. The money was wecumulated under a special tax concession rate of 25%. If the fund were repatriated, additional tax will be due. The company's weighted average cost of capital is 11%, cost of dollar borrowing is 9%, cost of Euro borrowing is 10%, and cost of equity is 18%. The all-equity Euro cost of capital is 15%. Times New 5 (Epe) Paragraph SEBU (1) Specify the discount rates for the calculation of the present value (PV) of after-tax operating cash flow, the PV of depreciation tax shield, and the PV of the salvage value of molding equipment (2) Discuss the financing of the project, including the amount of borrowing and borrowing cost. eft 1:26:17 The company's U.S. sales affiliate currently holds $1.5 million ready for repatriation back to Italy. The money was accumulated under special tax concession rate of 25%. If the fand were repatriated, additional tax will be due. The company's weighted average cost of capital is 11%, cost of dollar borrowing is 9% cost of Euro borrowing is 10%, and cost of is 18%. The all-equity Euro cost of capital is 15%. Pagraph Times New R 5 (1) EEB (3) Calculate the benefit of using concessionary loan. Time left 1:25:52 Paragraph Times New R S (18) SEEB (4) Calculate the amount of fund that will be freed up by the new project. (5) Assume the preliminary estimate of the 5-year project's APV is - 1,500,000, excluding the salvage value of molding equipment. What is the break-even salvage value of molding equipment? (hint: break-even salvage value is the salvage value at which the project's APV equals zero) 6) How much of the interest payment should be used to calculate interest tax shield, if the concessionary loan offered by the host city is $20 million? Write your answer as %. ft 1:24:57