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02 (22 points) 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 Ill is considering launching a new model of articolato track 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 $60 million. After the facility is ready, Caterpillar Ine can produce and sell the new model of articulated truck over the subsequent three consecutive years. The S60 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 sending 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 540 million per year and the variable cost will be 0.2 million per truck 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% retum on this project Please answer the following questions based on the information above 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! Points) What is the after-tax market salvage value of the facility? 16 Points) Calculate the cash flows on this project and show them in the following timeline table Joly July 2021 July July 2023 2020 2022 Operating Cash Flow Cash flows related with Net Capital Spending Cash flows related with Changes in Net Working Capital (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? 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.) points) Suppose the company needs to finance the project with external capital The company's target DE is 06. The flotation cost of debt is 3% and flotation cost of equity is 7%. The company will issue bonds to raise the necessary capital Page 7 of 10 Closed for Circulation 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 (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 relit 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 form decides to make use of the existing plant instead of huying 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 7 / 11 02 (22 points) 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 Ill is considering launching a new model of articolato track 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 $60 million. After the facility is ready, Caterpillar Ine can produce and sell the new model of articulated truck over the subsequent three consecutive years. The S60 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 sending 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 540 million per year and the variable cost will be 0.2 million per truck 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% retum on this project Please answer the following questions based on the information above 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! Points) What is the after-tax market salvage value of the facility? 16 Points) Calculate the cash flows on this project and show them in the following timeline table Joly July 2021 July July 2023 2020 2022 Operating Cash Flow Cash flows related with Net Capital Spending Cash flows related with Changes in Net Working Capital (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? 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.) points) Suppose the company needs to finance the project with external capital The company's target DE is 06. The flotation cost of debt is 3% and flotation cost of equity is 7%. The company will issue bonds to raise the necessary capital Page 7 of 10 Closed for Circulation 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 (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 relit 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 form decides to make use of the existing plant instead of huying 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 7 / 11