Compass Minerals has hired you as a consultant to evaluate its new project: it plans to spend $120m to expand the capacity ponds, and believes that this salt evaporation will generate $25m in revenues per year for the next 20 variable costs are expected to be 20% of revenues and working capital is expected to remain a constant $5m over the life of the project. The initial investment will be straight-line depreciated to zero over the 20 years,and the company does NOT expect any salvage value. The companys tax rate is 35%.
a) What is the initial cost of this project, and how much free cash flow will it generate for the company every year, once it becomes.
b) Calculate the Net Present Value (NPvo of this project, using a discount rate of 10%, and comment on whether you think it will create value for the company.
c) What would the Net Present Value (NPvy of this project be if its cash flows were expected to continue forever?