Executive Summary - Valuation of Manufacturing Plant of American Chemical Corporation (ACC).
1- Determination of weighted average cost of capital (WACC), cash flows and NPV of ACC's Collinsville Plant with and without Laminate technology.
2- Evaluation of plant's acquisition proposal on economic grounds.
3- Evaluation of plant's acquisition proposal on strategic grounds.
4- Strategic issues associated with the proposal.
5- At the given price and terms, should the proposal accepted. Alternatives, if any.
Determination of WACC.
For the purpose of determination of cash flow's present value, WACC is determined as 16%, as shown in the attached Exhibit B.
Present Value of Cash Flows.
The workings also show calculation for 5 years however, the plant have an expected life of 10 years and therefore, the cash flows are projected over 10 years. Without laminate technology, present value of 10 years free cash flows from plant (Exhibit C) is $9.2 million. The laminate technology enhances present value of plant's free cash flows (Exhibit E) by generating $5 million over the period of 10 years mainly due to the savings accrued (which are net of tax) in power and graphite costs, giving relief (17.5% power cost is saved due to the introduction of laminate). The tax consequence of plant's depreciation and scrap value (nil) and also enhances the laminate benefits.
Terminal Value & NPV.
For 10 years, Terminal value (Exhibit D) of the non-laminated plant has a discounted value of $0.83 million (obtained through the recovery from working capital and PP&E at the end. $9.2 million of "present value of free cash flows from unlaminated plant" is added to obtain present value of all inflow's excluding laminate technology. This is compared with the price of $12 million to arrive at plant's negative Net Present Value of $(-1.9) million from the unlaminated technology. To arrive at the total worth of the plant, that includes the laminate technology over its 10 years life, NPV of Laminate technology ($5 million) is added with the NPV of non-laminated plant ($-1.