Orchestra Inc. is considering expanding its production capacity. This has therefore called for the immediate purchase of a new plant which cost $50,000,000. This project will generate expected revenue of $19,500,000 per year. It is expected that the project would require $8,300,000 in cost of goods sold and $6,000,000 in operating expenses (excluding depreciation) Orchestra Inc. uses straight line depreciation. The project has useful life of 15 years and the plant has a residual value of $3,000,000 and will be sold at that amount at the end of the project. Orchestra's marginal tax is 30%. Suppose with the added plant, account receivables go up by $1,600,000, inventory shoots up by $1,600,000 and account payables also go up by $2,200,000 Required a) Calculate the free cash flows for the 15-year period of the project. b) Deduce the payback period, Net Project Value (NPV) and the IRR of the project assuming a WACC of 10% c) Should the project be accepted or rejected. Give justification for your answer.
Orchestra Inc. is considering expanding its production capacity. This has therefore called for the immediate purchase of a new plant which cost $50,000,000. This project will generate expected revenue of $19,500,000 per year. It is expected that the project would require $8,300,000 in cost of goods sold and $6,000,000 in operating expenses (excluding depreciation) Orchestra Inc. uses straight line depreciation. The project has useful life of 15 years and the plant has a residual value of $3,000,000 and will be sold at that amount at the end of the project. Orchestra's marginal tax is 30%. Suppose with the added plant, account receivables go up by $1,600,000, inventory shoots up by $1,600,000 and account payables also go up by $2,200,000 Required a) Calculate the
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