【正文】 ax rental or lease revenues. ? use elsewhere in the business, in which case the opportunity cost is the cost of replacing it. Aswath Damodaran 27 Case 1: Foregone Sale? ? Assume that Disney owns land in Bangkok already. This land is undeveloped and was acquired several years ago for $ 5 million for a hotel that was never built. It is anticipated, if this theme park is built, that this land will be used to build the offices for Disney Bangkok. The land currently can be sold for $ 40 million, though that would create a capital gain (which will be taxed at 20%). In assessing the theme park, which of the following would you do: a) Ignore the cost of the land, since Disney owns its already b) Use the book value of the land, which is $ 5 million c) Use the market value of the land, which is $ 40 million d) Other: Aswath Damodaran 28 Case 2: Incremental Cost? An Online Retailing Venture for Bookscape ? The initial investment needed to start the service, including the installation of additional phone lines and puter equipment, will be $1 million. These investments are expected to have a life of four years, at which point they will have no salvage value. The investments will be depreciated straight line over the fouryear life. ? The revenues in the first year are expected to be $ million, growing 20% in year two, and 10% in the two years following. ? The salaries and other benefits for the employees are estimated to be $150,000 in year one, and grow 10% a year for the following three years. ? The cost of the books will be 60% of the revenues in each of the four years. ? The working capital, which includes the inventory of books needed for the service and the accounts receivable will be10% of the revenues。 the investments in working capital have to be made at the beginning of each year. At the end of year 4, the entire working capital is assumed to be salvaged. ? The tax rate on ine is expected to be 40%. Aswath Damodaran 29 Cost of capital for investment ? Wee will reestimate the beta for this online project by looking at publicly traded Inter retailers. The unlevered total beta of inter retailers is , and we assume that this project will be funded with the same mix of debt and equity (D/E = %, Debt/Capital = %) that Bookscape uses in the rest of the business. We will assume that Bookscape’s tax rate (40%) and pretax cost of debt (6%) apply to this project. Levered Beta Online Service = [1 + (1 – ) ()] = Cost of Equity Online Service = % + (6%) = % Cost of CapitalOnline Service= % () + 6% (1 – ) () = % Aswath Damodaran 30 Incremental Cash flows on Investment NPV of investment = $98,775 Aswath Damodaran 31 The side costs… ? It is estimated that the additional business associated with online ordering and the administration of the service itself will add to the workload for the current general manager of the bookstore. As a consequence, the salary of the general manager will be increased from $100,000 to $120,000 next year。 the aftertax contribution margin on this product is $5 a unit. ? The book value of the factory is $ 1 million. The cost of building a new factory with the same capacity is $ million. The pany’s cost of capital is 12%. Aswath Damodaran 35 A Framework for Assessing The Cost of Using Excess Capacity ? If I do not add the new product, when will I run out of capacity? ? If I add the new product, when will I run out of capacity? ? When I run out of capacity, what will I do? 1. Cut back on production: cost is PV of aftertax cash flows from lost sales 2. Buy new capacity: cost is difference in PV between earlier amp。 to a bookstore: Bookscape ? The initial cost of remodeling a portion of the store to make it a cafe, and of buying equipment is expected to be $150,000. This investment is expected to have a life of 5 years, during which period it will be depreciated using straight line depreciation. None of the cost is expected to be recoverable at the end of the five years. ? The revenues in the first year are expected to be $ 60,000, growing at 10% a year for the next four years. ? There will be one employee, and the total cost for this employee in year 1 is expected to be $30,000 growing at 5% a year for the next 4 years. ? The cost of the material (food, drinks ..) needed to run the cafe is expected to be 40% of revenues in each of the 5 years. ? An inventory amounting to 5% of the revenues has to be maintained。: Stand alone analysis Aswath Damodaran 41 The side benefits ? Assume that the cafe will increase revenues at the book store by $500,000 in year 1, growing at 10% a year for the following 4 years. In addition, assume that the pretax operating margin on these sales is 10%. ? The present value of the added benefits is $115,882. Added to the NPV of the standalone Caf233。 consequently, we will add the country risk premium of % for India. ? We will assume that Sensient will maintain its existing debt to capital ratio of %, its current dollar cost of debt of % and its marginal tax rate of 37%. ? Cost of debt in US $ = % () = % ? Cost of capital in US $ = % () + % ()= % ? Cost of capital in Rs = = ??(1 ? Cos t of Ca p i t a l U S $ ) ( 1 ? I n f l a t i on Ra t e Rs )( 1 ? I nfl a t i on Ra t eU S $ ) 1??(1 . 0 9 6 ) (1 . 03 )(1 . 02 ) 1 = 10 .67%Aswath Damodaran 44 Estimating the value of synergy… and what Tata can pay for Sensient… ? We can now discount the expected cash flows back at the cost of capital to derive the value of synergy: ? Value of synergyYear 3 = ? Value of synergy today = ? Earlier, we estimated the value of equity in Sensient Technologies, with no synergy, to be $1,107 million. Converting the synergy value into dollar terms at the current exchange rate of Rs $, the total value th