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The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment
The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm's balance sheet.)
Apple Inc. currently has property and equipment as $33,766,000
The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost. The annual EBIT for this new project will be 18% of the project's cost. The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use 35% as the tax rate in this project.
Required:
Calculations for the amount of property, plant, and equipment and the annual depreciation for the project
Calculations that convert the project's EBIT to free cash flow for the 12 years of the project.
Net present value
Internal rate of return
Discounted payback period
Expert Solution
| Current PPE Value of Apple Inc = | 33,766,000 | |
| Investment for Expansion =10%*33,766,000= | 3,376,600 | |
| Salvage value after 12 years =5%*3,376,600= | 168,830 | |
| Depreciation Value of Investment=3,376,600-168,830= | 3,207,770 | |
| Useful life in years | 12 | |
| Annual SL Depreciation =3207770/12= | 267,314.17 | |
| Tax rate =35% | ||
| Incremental EBIT =18%*3,376,600= | 607,788.00 | |
| Less Tax @35%= | 212,725.80 | |
| After Tax Inceremnetal Earning per year | 395,062.20 | |
| WACC =discount factor =8% | ||
| Free Cash Flow NPV & IRR Calculation : | ||
| So, Amount of Investment in Prpoerty , Plant & Equipment= | $ 3,376,600 | Ans |
| Annual Depreciation for the project = | $ 267,314.17 | Ans |
| Ans | ||||||||
| Year =n | Initial Investment | Annual After Tax Income | Add Back depreciation | Salvage Value | Total Free Cash flow | PV Factor @8% | PV of Free Cash Flow | Cumulative PV of Cash flows |
| 0 | (3,376,600) | (3,376,600.00) | 1.0000 | (3,376,600.00) | (3,376,600.00) | |||
| 1 | 395,062.20 | 267314.17 | 662,376.37 | 0.9259 | 613,311.45 | (2,763,288.55) | ||
| 2 | 395,062.20 | 267314.17 | 662,376.37 | 0.8573 | 567,880.97 | (2,195,407.58) | ||
| 3 | 395,062.20 | 267314.17 | 662,376.37 | 0.7938 | 525,815.72 | (1,669,591.86) | ||
| 4 | 395,062.20 | 267314.17 | 662,376.37 | 0.7350 | 486,866.40 | (1,182,725.46) | ||
| 5 | 395,062.20 | 267314.17 | 662,376.37 | 0.6806 | 450,802.23 | (731,923.23) | ||
| 6 | 395,062.20 | 267314.17 | 662,376.37 | 0.6302 | 417,409.47 | (314,513.76) | ||
| 7 | 395,062.20 | 267314.17 | 662,376.37 | 0.5835 | 386,490.25 | 71,976.48 | ||
| 8 | 395,062.20 | 267314.17 | 662,376.37 | 0.5403 | 357,861.34 | 429,837.82 | ||
| 9 | 395,062.20 | 267314.17 | 662,376.37 | 0.5002 | 331,353.09 | 761,190.92 | ||
| 10 | 395,062.20 | 267314.17 | 662,376.37 | 0.4632 | 306,808.42 | 1,067,999.34 | ||
| 11 | 395,062.20 | 267314.17 | 662,376.37 | 0.4289 | 284,081.87 | 1,352,081.21 | ||
| 12 | 395,062.20 | 267314.17 | 168,830.0 | 831,206.37 | 0.3971 | 330,083.48 | 1,682,164.69 | |
| Total Free Cash flow | 1,682,164.69 |
| Net Present Value of The Expansion project = | $ 1,682,164.69 | Ans |
| Internal Rate of Return ( Using =IRR excel formula)= | 16.66% | Ans |
| Discounted Payback period =6 years+314513.76/386490.25= | 6.81 years. | Ans. |
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