1. acfi 701 homework restructure amp ford
(1) 5 ptsThis work must be your own. Reply on an Excel spreadsheetFord Motor has been
successfully producing the Ford Aspire in India. It has best-in-class safety features and has
premium interiors. Designed to exude success, it’s been chosen the best car in India by
several critics. Ford now wishes to extend the product into other parts of Asia and is
considering producing the car in China.This will involve an initial investment of RMB 4
billion in year zero. The plant will start production in year one. The plant is then expected to
produce cars for ten years. We can also assume a salvage value at the end, year 10, of RMB
500 million. The tax law there allows the use of the straight-line method over the ten years
of cash flow to depreciate the original value to the salvage value.The plant will produce
80,000 cars per year. Ford assumes that it can sell the cars initially for RMB 65,000.
Thereafter the selling price is expected to increase 4% per year.Auto production materials
for each car are expected to be RMB 18,000 per vehicle in the initial production year and
increase at 2% per year.Total labor costs for the plant are forecasted to cost RMB 1.1 billion
and thereafter increase at 7% per year.Ford will rent the land on which the plant is built for
RMB 300 million per year. The initial payment is upfront, in year zero, so this is a year zero
expense through a year 10 expense.Ford’s cost of capital is 15%. Profits are taxed at
21%. (Remember that Ford is a big company with lots of ongoing operations. With all
projects, it’s important to think on the margin. Ask what impact this has using that
frame of reference. Tax is a great place to apply this thinking. Ford pays taxes as long as the
entire firm is profitable, right? In a year when this project makes a profit, it creates an
additional tax liability for Ford. What about in startup (or construction) years when this
project creates a loss? Doesn’t this project in those years create expenses that are
swallowed up in the vastness that is Ford? That also means that this creates expenses which
cause a reduction in Ford’s tax liability that year. Does that mean an internal tax credit
or savings can be applied to this project?)Assume all cash flows take place at the end of the
year.What is the NPV? (1 pt) The IRR? (1 pt) The Payback? (1 pt).If labor costs actually
increase by 10%, what is the NPV? (1 pt).Return labor costs to a 7% increase: If the cost of
capital is recalculated and determined to be 16%, what is the NPV? (1 pt) Fill all answer
cells with yellow paint, I will grade only those. Don’t fill yellow paint on any cell except
an answer cell. Be very careful, it’s important that many of you do well on this and one
mistake can obliterate the entire spreadsheet.(2) 5pts, ½ pt eachAnswer these questions
on the same XL sheet, true or false: (list “a†through “j†in column A and
“true†or “false†in column B)a. Bankruptcy Chapter 7 is about closing down a
2. firm and liquidating its assetsb. In an LBO, one of the first tasks of a financial manager is to
pay down debtc. The main characteristics of leveraged restructurings are high debt,
incentives to management, and private ownership.d. Private equity partnerships have
limited lives, forcing the sale of portfolio companiese. Private equity managers
compensation depends on the exit value of a companyf. Although a firm going through
Chapter 11 is still a new entity, there is new equity, it is entitled to tax-loss carry forwardsg.
In a bankruptcy, junior creditors at the bottom of the capital structure are incentivized to
play for timeh. Chrysler’s 2009 bankruptcy is an example where absolute priority of
payments were not adhered toi. When accompany becomes bankrupt, it is usually in the
interests of stockholders to seek a liquidation rather than a reorganizationj. Large, multi-
tech firms have a significant risk because they tend to under-invest in disruptive ideas.
