Houston Inc. is considering a project which involves building a new refrigerated
warehouse which will cost $7,000,000 at year = 0 and which is expected to have
before tax operating cash flows of $500,000 at the end of each of the next 20 years.
The Net Working Capital required initially is $50,000, no additional NWC is
required after year 0. The company’s corporate tax rate is 25%. Depreciation of
$350,000 is included in the before tax operating cash flow. In year 20 the asset can
be sold before tax at $75,000.
Part I: If Houston's WACC is 8 percent, what is the project’s NPV? IRR? PI?
Payback?
Determine the capital budget for Years 0 – 20 and perform the necessary capital
budget analysis.
Part II: The risk/sensitivity factor is WACC. Should WACC increase to 8.5
percent, could this influence your decision on the project? What would happen to
NPV?
1 answer