SNAP Cosmetics, Inc. is contemplating building a new plant to manufacture a new metallic cosmetic products line. The cost to build the plant is $75 million and the plant is expected to last for 20 years. This cost can be depreciated over the full 20-year life of the plant using straight line depreciation. The total salvage value of the plant is $2 million, in nominal terms, at the end of year 20 and is attributed to the original expenditure on the plant for tax purposes.
The attached table shows, in nominal dollars, the annual revenues less costs of goods sold (COGS) for the proposed metallic product line in its first operating year. Revenues and COGS are expected to grow at 4% per year in nominal terms for the first 10 years of the plant’s life and then 0% in nominal terms for the remainder of the plant’s life. In addition, the plant will be built on land that is owned by SNAP Cosmetics, which could be rented out for $500,000 per year in nominal terms before taxes during the 20 years the plant is operating.
The total working capital requirements are $10 million in the first year and are expected to remain constant in nominal terms in each subsequent year. When the plant ceases production in year 20 all the working capital can be recovered.
The rate of inflation is expected to be 2% per year for the entirety of the plant’s life. SNAP Cosmetics’ total tax rate is 40%. Its opportunity cost of capital for projects of this type is 14% in nominal terms. Assume all cash flows occur at year’s end.
Please prepare a professional written memo (including any tables, which should have appropriate labels and legends). In the first sentence of your write-up, state the NPV of the metallic cosmetic plant and whether SNAP cosmetics should build the plant. Write-up should include a graphic of the cash flows associated with the plant over time and, if necessary, carefully state any additional assumptions that you make in order to solve the problem
Gross Margin Analysis of Proposed Metalllic Cosmetics Line, as of 12/31/2015
Summary: This question belongs to finance and discusses about a cosmetic company’s financials and asked to prepare a professional written memo which includes cash flows and all the necessary information.
Total word count: 777
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