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A shipbuilder is considering investing in a new project. The shipbuilder will make one...

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Finance

A shipbuilder is considering investing in a new project.

The shipbuilder will make one ship per year and sales will be 10 MUSD per year.

The outlay at the end of year 0 for machines etc. is 9 MUSD. Machines etc. will be depreciated straight line over 3 years to a residual value of 0.

Costs of goods sold and operating expenses other than depreciation are 7 MUSD per year for year 1, 2 and 3.

Net working capital needed is 1 MUSD from the end of year 1 through to the end of year 3.

The marginal corporate tax rate is 20% and the cost of capital is 10%.

a)Calculate the shipbuilders unlevered net income after tax for year 0, 1 and 2.

b) Forecast the change in net working capital for year 0, 1, 2, 3 and 4.

c) Calculate free cash flow for year 0 and 1.

d) By how much would the NPV of the project change if the shipbuilder receives the sales payment for year 1 at the very beginning of year 1 instead of at the end of the year.

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