The electricity company Taurus Inc.hires you to evaluate the acquisition of a wind power plant. The plant's basic acquisition price is $100 million, and would cost another $20 million to modify it for special use by the firm.
The plant belongs to the MACRS 5-year class, and would be sold after 5 years for an estimated $40 million at market value.
(Note: MACRS 5-year-class plan --- 20.00%, 32.00%, 19.20%, 11.52%, 11.52%, and 5.76% to be depreciated for Year 1, 2, 3, 4, 5 and 6, respectively.)
The wind power plant is expected to increase Taurus's electricity sales revenue by $45 million at Year 1, thereafter growing by 4% per year till the end of project life.
The plant will also increase Taurus' operating costs (i.e., COGS + SGA expenses) by $17 million at Year 1, thereafter growing by 5% per year till the end of project life. Net operating working capital of each year equals 15% of sales revenue projected for the subsequent year.
The side effects and opportunity costs of this new power plant are negligible.
Taurus's WACC is estimated to be 8.50% based on its existing business risk level. All cash flows and WACC are in real (deflated) amounts. Taurus also has a time-constraint policy that requires the full initial investment to be paid back within 5 years.
The newly effective federal-plus-state tax rate for the future years is 21% + 5% = 26%.