You are considering an investment in nickel mines in Russia. Your expectations are that you will...

90.2K

Verified Solution

Question

Finance

You are considering an investment in nickel mines in Russia.Your expectations are that you will take losses eventually, butonce infrastructure is built, the project will become moreprofitable very quickly. You have estimated that the initialrevenues will be $100 million per year and grow at a rate of 45%per year for four years. Due to political risk, you decide to useonly a four-year horizon for planning purposes. Variable costs areexpected to be 70% of sales; fixed costs are projected to be $10million per year.
Initial cost of machinery, land, equipment and other thingsamounts to $110 million. This $110 million will be depreciatedstraight-line to zero over a seven-year accounting life. However,the expected market value of the fixed assets at the end of fouryears is $50 million. Net working capital requirements are minimal,just $10 million at the beginning of the project, all of which willbe recovered at termination. Tax rate of your company is 30%.
This project will be financed with both debt and equity. Theplan is to mirror the firm’s target capital structure by issuing 15million shares of stock priced at $10.00 a share and $170 millionface value of 10-year bonds which will be priced at 94% of par if acoupon of 7% is offered to investors. The company will paydividends of $3.60 per year (starting in one year) and increase thedividend by 4% per year indefinitely. Treasury bills offer 1%return and the expected market returns are 11% per year. Thestock’s beta is 1.8. Assume flotation costs are 6% for debt and 18%for equity and are incurred only for the $100 million outlay forfixed assets. Create an Excel template where all the necessarycalculations are made.
What are the cash flows each year from this project?
What is the W ACC?
What is the total initial cost after adjusting for flotationcosts?
What are the NPV, IRR, PI and simple (not discounted) paybackperiod for the project?
WILL YOU ACCEPT THE PROJECT OR NOT? WHY (OR WHY NOT)

Answer & Explanation Solved by verified expert

4.3 Ratings (922 Votes)

Depreciation calculations Dep per year 110 07 1571 WACC calculation cost of equity Ke Ke Rf betaRm Rf Ke 1 1811 1 19 Cost of debt yield to maturity Settlement date 3312020 Maturity date 3302030 Coupon rate 7 Price 94 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

You are considering an investment in nickel mines in Russia.Your expectations are that you will take losses eventually, butonce infrastructure is built, the project will become moreprofitable very quickly. You have estimated that the initialrevenues will be $100 million per year and grow at a rate of 45%per year for four years. Due to political risk, you decide to useonly a four-year horizon for planning purposes. Variable costs areexpected to be 70% of sales; fixed costs are projected to be $10million per year.Initial cost of machinery, land, equipment and other thingsamounts to $110 million. This $110 million will be depreciatedstraight-line to zero over a seven-year accounting life. However,the expected market value of the fixed assets at the end of fouryears is $50 million. Net working capital requirements are minimal,just $10 million at the beginning of the project, all of which willbe recovered at termination. Tax rate of your company is 30%.This project will be financed with both debt and equity. Theplan is to mirror the firm’s target capital structure by issuing 15million shares of stock priced at $10.00 a share and $170 millionface value of 10-year bonds which will be priced at 94% of par if acoupon of 7% is offered to investors. The company will paydividends of $3.60 per year (starting in one year) and increase thedividend by 4% per year indefinitely. Treasury bills offer 1%return and the expected market returns are 11% per year. Thestock’s beta is 1.8. Assume flotation costs are 6% for debt and 18%for equity and are incurred only for the $100 million outlay forfixed assets. Create an Excel template where all the necessarycalculations are made.What are the cash flows each year from this project?What is the W ACC?What is the total initial cost after adjusting for flotationcosts?What are the NPV, IRR, PI and simple (not discounted) paybackperiod for the project?WILL YOU ACCEPT THE PROJECT OR NOT? WHY (OR WHY NOT)