Arnold Inc. is considering a proposal to manufacture? high-end protein bars used as food supplements by...

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Arnold Inc. is considering a proposal to manufacture? high-endprotein bars used as food supplements by body builders. The projectrequires use of an existing? warehouse, which the firm acquiredthree years ago for $ 4 million and which it currently rents outfor $ 111 comma 000 . Rental rates are not expected to change goingforward. In addition to using the? warehouse, the project requiresan upfront investment into machines and other equipment of $ 1.6million. This investment can be fully depreciated? straight-lineover the next 10 years for tax purposes. ? However, Arnold Inc.expects to terminate the project at the end of eight years and tosell the machines and equipment for $ 422 comma 000 . ? Finally,the project requires an initial investment into net working capitalequal to 10 percent of predicted? first-year sales. ? Subsequently,net working capital is 10 percent of the predicted sales over thefollowing year. Sales of protein bars are expected to be $ 4.8million in the first year and to stay constant for eight years.Total manufacturing costs and operating expenses? (excludingdepreciation) are 80 percent of? sales, and profits are taxed at 30percent.
a. What are the free cash flows of the? project?
b. If the cost of capital is 15 %, what is the NPV of the?project?

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4.2 Ratings (825 Votes)

a Assumptions 1 The warehouse can be rented out again for 111000 after 8 years 2 The NWC is fully recovered at book value after 8 years FCF EBIT 1 t Depreciation CAPX Change in NWC See Answer

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Arnold Inc. is considering a proposal to manufacture? high-endprotein bars used as food supplements by body builders. The projectrequires use of an existing? warehouse, which the firm acquiredthree years ago for $ 4 million and which it currently rents outfor $ 111 comma 000 . Rental rates are not expected to change goingforward. In addition to using the? warehouse, the project requiresan upfront investment into machines and other equipment of $ 1.6million. This investment can be fully depreciated? straight-lineover the next 10 years for tax purposes. ? However, Arnold Inc.expects to terminate the project at the end of eight years and tosell the machines and equipment for $ 422 comma 000 . ? Finally,the project requires an initial investment into net working capitalequal to 10 percent of predicted? first-year sales. ? Subsequently,net working capital is 10 percent of the predicted sales over thefollowing year. Sales of protein bars are expected to be $ 4.8million in the first year and to stay constant for eight years.Total manufacturing costs and operating expenses? (excludingdepreciation) are 80 percent of? sales, and profits are taxed at 30percent.a. What are the free cash flows of the? project?b. If the cost of capital is 15 %, what is the NPV of the?project?