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QUESTION 17 XYZ Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars) Items Year 1 Year2 Revenues 125 160 Costs of Good sold and operating expenses and other 40 60 than depreciation Depreciation 25 36 Increase in net working capital 5 8 Capital expenditures 30 40 Marginal corporate tax rate 35% 35% What are the incremental earnings for this project for years 1 and 2? (2 marks) If the initial investment of the project is 10 thousand dollars and the cost of capital for this project is 15%, what is your estimate of the value of the new project using the DFCF approach? (1.5 marks) d. If XYZ has a debt of 5 thousand dollars and its number of shares outstanding is 2 thousand shares, what is the price of its stock? (1.5 marks) a TT T Arial 3 (12pt) T-E- QUESTION 17 XYZ Enterprises is deciding whether to expand its production facilities. Although long-term cash flows are difficult to estimate, management has projected the following cash flows for the first two years (in millions of dollars) Items Year 1 Year2 Revenues 125 160 Costs of Good sold and operating expenses and other 40 60 than depreciation Depreciation 25 36 Increase in net working capital 5 8 Capital expenditures 30 40 Marginal corporate tax rate 35% 35% What are the incremental earnings for this project for years 1 and 2? (2 marks) If the initial investment of the project is 10 thousand dollars and the cost of capital for this project is 15%, what is your estimate of the value of the new project using the DFCF approach? (1.5 marks) d. If XYZ has a debt of 5 thousand dollars and its number of shares outstanding is 2 thousand shares, what is the price of its stock? (1.5 marks) a TT T Arial 3 (12pt) T-E

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