amgarces77
Nov 22, 2009, 06:27 PM
Hewlett-Packard Project Analysis
Hewlett-Packard is considering expanding an existing production facility in order to produce their next generation of notebook computers. The project would require an initial investment in new production facilities and equipment of $600 million in 2009 would fall in the 7-year MACRS depreciation class. Hewlett-Packard has already spent $50 million designing and developing the new generation of notebook and they will need additional net working capital of $100 million in 2009. Two different Iterations of the notebooks can be produced by the new expanded production facility and equipment over the expected 6-year life of this project. Because of this an additional $150 million in working capital will be needed in 2012. The table following this paragraph contains sales, sale price, variable cost & fixed cost projections over the expected life of the project. The company’s marginal tax rate is 40% and this project is assumed to be of slightly above average risk for Hewlett-Packard with a project beta that is 15% higher than HP’s company beta of 1.0. The risk-free rate is 2.5% and the market risk premium is 8%. HP’s capital structure consists of 10% debt and 90% common equity financing and their before-tax cost of new debt is 6%.
Year
Expected Unit Sales
Avg. Sales Price/unit
Avg. Variable costs/unit
Additional Fixed Costs
2010
700,000
$800
$500
$300,000
2011
1,000,000
$750
$500
$300,000
2012
700,000
$700
$500
$300,000
2013
800,000
$820
$500
$300,000
2014
1,200,000
$800
$500
$300,000
2015
900,000
$750
$500
$300,000
At the end of 2015, Hewlett-Packard will end the project and can sell their production facility & equipment for $100 million in addition to liquidating the extra net working capital that was needed for the project.
Answer the following:
1. What are the estimated cash flows for this proposed project? (Hint: start with the initial cash flow in 2009 and calculate the total annual cash flows for the 6 years from 2010 to 2015).
2. What is the risk-adjusted cost of capital for the project?
3. What is the NPV of the project?
4. What is the IRR for the project?
5. What is the MIRR for the project?
6. What is the difference between IRR and MIRR?
7. Should this project be accepted? Why or why not?
Hewlett-Packard is considering expanding an existing production facility in order to produce their next generation of notebook computers. The project would require an initial investment in new production facilities and equipment of $600 million in 2009 would fall in the 7-year MACRS depreciation class. Hewlett-Packard has already spent $50 million designing and developing the new generation of notebook and they will need additional net working capital of $100 million in 2009. Two different Iterations of the notebooks can be produced by the new expanded production facility and equipment over the expected 6-year life of this project. Because of this an additional $150 million in working capital will be needed in 2012. The table following this paragraph contains sales, sale price, variable cost & fixed cost projections over the expected life of the project. The company’s marginal tax rate is 40% and this project is assumed to be of slightly above average risk for Hewlett-Packard with a project beta that is 15% higher than HP’s company beta of 1.0. The risk-free rate is 2.5% and the market risk premium is 8%. HP’s capital structure consists of 10% debt and 90% common equity financing and their before-tax cost of new debt is 6%.
Year
Expected Unit Sales
Avg. Sales Price/unit
Avg. Variable costs/unit
Additional Fixed Costs
2010
700,000
$800
$500
$300,000
2011
1,000,000
$750
$500
$300,000
2012
700,000
$700
$500
$300,000
2013
800,000
$820
$500
$300,000
2014
1,200,000
$800
$500
$300,000
2015
900,000
$750
$500
$300,000
At the end of 2015, Hewlett-Packard will end the project and can sell their production facility & equipment for $100 million in addition to liquidating the extra net working capital that was needed for the project.
Answer the following:
1. What are the estimated cash flows for this proposed project? (Hint: start with the initial cash flow in 2009 and calculate the total annual cash flows for the 6 years from 2010 to 2015).
2. What is the risk-adjusted cost of capital for the project?
3. What is the NPV of the project?
4. What is the IRR for the project?
5. What is the MIRR for the project?
6. What is the difference between IRR and MIRR?
7. Should this project be accepted? Why or why not?