SECTION 1

1. McCormick & Company is considering building a new factory in Largo, Maryland. The purchase price of the Land is $14,000,000. The building and equipment is expected to cost $350,000,000. What will be the cash outflow for the project at the time of purchase (year zero)? We call this cash flow zero. Please round to the nearest $100,000. That makes the purchase price of the land $14.0 million.

2. Mc Cormick expects to produce a new product that is "Secret" at this point. However, there are some estimates of revenue, expense, depreciation and tax. To simplify, you have been asked to assume that revenue, expense and tax are all cash flow numbers. We only discount cash flows.

You are requested to calculate annual after tax cash flow for the "Secret" project. Note: Depreciation is not a cash flow. The cash outflow associated with depreciation happens when the building and equipment is purchased. This is shown as cash flow zero. We will make an assumption that the company will use straight line depreciation of 10% per year for tax deprecation. This will simplify our work. The actual tax code depreciation is too complex for this problem.

Depreciation ends in year 10 when all of the plant and equipment, $350 million will be recovered. Land is never depreciated

Fill in the blanks below in the Q-2 table

3. Create an after tax cash flow time line from year zero to year 21. Remember that the cost of the building and land is a cash outflow in year zero. We will assume that we sell both land and building in year 21 for $10 million after tax cash inflow. Add the Year 0 and year 21 cash flows to the after tax cash flows from table in Q-2. Use the format in Q3 below and create a cash flow time line.

4.. Calculate the Net Present Value of the project using a discount rate of 7% and the NPV excel function. Since there is no spot for cash flow zero in the NPV function, you must add the negative cash flow zero to the results of the NPV function. Use the NPV function to calculate the Net Present Value of the "Secret" project.

5. . Let's assume that one board member is a famous surgeon form Los Angeles. She always asks about the return promised by the project. The CFO tells you that this can be calculated by using the IRR function to find the internal rate of return. Calculate the IRR for the "Secret" project. We accept projects with IRRs above the discount rate used by the company. In this case the discount rate is 7% After you calculate the IRR would you accept the project? Calculate the IRR for the Secret Project using the IRR function.

6. Let's assume that another board member grew a construction business from one truck to a $3 billion company. He is a bit unsophisticated and measures risk by payback. Payback is the number of years before all of the cash inflows equal the cash outflow in year zero. Calculate the payback in years for the secret project. If the payback occurs part way through a year, round up to the next full year. CFOs often use payback in conversations with board members for outstanding projects

Finance professors dislike payback and write papers about why it is a and measure. But very wealthy investors use it as a shortcut. CFOs also use payback in conversations with board members for projects with outstanding financial results.

To calculate payback add all of the cash flows until you get to zero and that is the payback in years. Calculate the Payback in years for the Secret Project.

SECTION 2
1. The company uses Goldman Sachs for its investment banker and Peter Fields, a Goldman Sachs managing director, has suggested that McCormick consider on of two choices for financing. There is an innovative hedge fund group that will loan $350 million to Mc Cormick for 10 years in a zero interest bond. At the end, McCormick will owe $550 million. The fee to Goldman will be paid by the hedge fund. Use the PV function to calculate the present value of the $350 million zero interest bond using a rate of 4%. Divide the rate by 2 and use 20 periods to compare to the standard bond. Make the $550 a positive number to see the cost today as a negative number. Compare to the $350 million that the company will get in cash if it agrees to this deal. Your answer should be a cost or negative number.

2. The alternative is a traditional 20 year bond that will pay 4% interest with semi annual interest payments of 2% of the amount owed. The principal ($350 million) will be due at the end of 20 years. The bond will be sold to mutual funds and life insurance companies. If Mc Cormick takes this alternative, it will owe Goldman Sachs a fee of 9/10 of 1% of the $350 million. This fee will be deducted from the initial proceeds of the bond sale.

McCormick CFO would like to know which financing will cost less. To evaluate financing, Mc Cormick uses the current cost of debt which is 4% as the annual discount rate. Use the PV function. Make the $350 principal payment in year 20 a positive number to show it as a cost today. Calculate the Goldman fee as a cost today (time zero). Negative numbers are costs today. Use 4% divided by 2 (2%) as the semi annual discount rate. Use 40 periods. Use $7 million as the interest amount paid twice each year (Pmt)

3. Next we will calculate the effective interest rate for each alternative using the RATE function in Excel. For the 20 year loan, we will use semi-annual compounding as interest is paid every 6 months. Enter 2% of the principal (minus 2% x $350) into the PMT box. Since there are 40 interest payments, enter 40 in the NPER box. Put the value at maturity as minus $350 into the FV box. Put the amount of cash that McCormick receives after paying the Goldman Sachs fee into the PV box ($350 minus the fee). Hit enter and find a semi annual fee slightly above 2% Show 2 decimal places. Multiply by 2 to go back to an annual rate. What is your answer in % for the annual rate?

4. Next use the RATE function for the zero Interest Loan. Since it is a 10 year loan and we want to make it comparable, we will set NPER equal to 20. We enter minus $550 in the FV box and $350 in the PV box. The functions will calculate a semi annual rate. Multiply by 2 to get the annual rate. What is your answer in % for the annual rate?

5, Now that you have two calculations for each loan, which is less cost? Which would you recommend and why?

SECTION 1 1. McCormick &amp; Company is considering building a n...

SECTION 1 1. McCormick & Company is considering building a n...