Financing (6 points)

Project financing

Bev-Pak Inc. is planning to start a €50-million investment to build a new beverage container plant with total capacity of 2 billion cans produced per year. Bev-Pak is expecting Coca-Cola and PepsiCo. to buy cans over 5 years of operations, with expected annual revenue of €18millions, and operations costs no greater than €2millions per year.

Assuming you are the Bev-Pak project manager, please advise on the following issues:
1. suggest the most suitable contract organization to implement the project;
2. determine the funding scheme for the facility investment;
3. assess the present value of the project investment.
Please consider the following assumptions, and feel free to make any additional hypotheses, if necessary: annual interest rate on debt capital 7%, cost of equity 11%, marginal corporate tax rate 40%.

Total investment = E+D = 50 mln Euros

Annual expected revenue = 18 mln Euros
Annual operational expenses = 2 mln Euros
Operational years = 5 years
Kd=7%, Ke = 11%, Tax = 40%
Nondeductible interest or deductible interest for taxes
Net income => Gross Profit = EBITDA= Revenue – Expenses = 18-2 = 16 mln Euros
Capital expenditure = 50 mln Euros have life cycle = 40 years, then DA = 50 mln Euros / 20 years = 2.5 mln Euros /year

Revenue	18 mln
Operational Expenses	2 mln
GROSS PROFIT	16 Euros
DA	$ 1.25 mln
EBIT	$ 16-1.25 = 14.75 mln
Tax	40%
Tax amount	$ 5.9 mln
EBI	$ 10.1 mln
Interest + Principal	$

Loan duration: 5 years, Principal (year) = 1/5 *D, Interest rate (year) = 0.07 *D

Total I+P = 0.2D+0.07D = 0.27 D


= =

= 50*(16-0.27D) = D*(50*0.11-0.11*D +0.07*D)
800 – 13.5 D = 5.5D -0.04 D² (*100)
4 D² – 1900*D + 80000 = 0
Discriminant = 1527
D1 = (1900 -1527 )/8 = 46.6 mln Euros = Amount of debt
Equity = 50-46.6 = 3.4 mln Euros

NPV = - 50 mln + 10.1 mln /(1+0.07)^0 + 10.1 /(1+0.07)^1 + 10.1 /(1+0.07)^2 + 10.1 /(1+0.07)^3+10.1 /(1+0.07)^4 = - <0