All American Pipeline
The business nature of the project—pipelines—affected many of our assumptions and approaches to our calculations for our ultimate decision. The case provided two sets of cost estimates from an outside consultant and from Goodyear after hiring a general contractor. We utilized both sets of costs that directed us to the same decision that Goodyear should not go ahead with the Pipeline Project.
Once we obtained the UFCF, the terminal value was calculated in three different ways, treating the pipeline as an asset on our books, finding the value of project if cash flows are received for perpetuity an finding the annuity value of cash flows for 30 years by assuming that after 1992 cash …show more content…
This assumption has been based on the fact that after reaching capacity production the increase in revenue and expenses will be based on the inflation rate.
Assumptions for Consultants’ estimates
• We have assumed that the capital expenditure, estimated by the consultants is invested evenly over two years in terms of 1983 dollars.
• Land and right of way cost the same as given in estimates of the contractors.
• Operating expenses have been assumed to be 145.3 million annually in 1983 dollars and have been adjusted by inflation rate of 5% from 1985 onwards.
• For tax purposes, depreciation schedule is used to be the same as that provided by the contractors
• Investment tax credit in this case is assumed to be the same as contractors’ figures, as the Depreciable PPE is almost the same in both cases.
2. What is the WACC? (We did this question first to get the WACC we need in order to use the perpetuity method in finding the terminal value in question 1.)
To find WACC, we used the following equation:
WACC = (1 – t * (D/V)) * rU
To find Celeron’s beta of debt, we assume that Goodyear has a bond rating of Baa. Therefore, rD of Celeron, a company owned by Goodyear is assumed to be 14.26%, which is the return rate for Moody’s Baa Corporate long term bond. rf is assumed to be equal to the 12.30%, return on 30-year treasury bonds, since