Cashflow to Firm












Illustration 5.6: Estimating Cash Flows to Equity for a New Plant: Aracruz

Aracruz Cellulose is considering a plan to build a state-of-the-art plant to manufacture linerboard. The plant is expected to have a capacity of 750,000 tons and will have the following characteristics:

1. It will require an initial investment of 250 Million BR. At the end of the fifth year, an additional investment of 50 Million BR will be needed to update the plant.

2. Aracruz plans to borrow 100 Million BR, at a real interest rate of 5.25%, using a 10-year term loan (where the loan will be paid off in equal annual increments).

3. The plant will have a life of 10 years. During that period, the plant (and the additional investment in year 5) will be depreciated using double declining balance depreciation, with a life of 10 years.4 At the end of the tenth year, the plant is expected to be sold for its remaining book value.

4. The plant will be partly in commission in a couple of months, but will have a capacity of only 650,000 tons in the first year, 700,000 tons in the second year before getting to its full capacity of 750,000 tons in the third year.

5. The capacity utilization rate will be 90% for the first 3 years, and rise to 95% after that.

6. The price per ton of linerboard is currently $400, and is expected to keep pace with inflation for the life of the plant.

7. The variable cost of production, primarily labor and material, is expected to be 55% of total revenues; there is a fixed cost of 50 Million BR, which will grow at the inflation rate.

8. The working capital requirements are estimated to be 15% of total revenues, and the investments have to be made at the beginning of each year. At the end of the tenth year, it is anticipated that the entire working capital will be salvaged.

4 With double declining balance depreciation, we double the straight line rate (which would be 10% a year in this case with a 10-year life) and apply that rate to the remaining book value. We apply this rate to the investment in year 5 as well.

Before we estimate the net income on this project, we have to consider the debt payments each year and break them down into interest and principal payments. Table 5.6 summarizes the results:

Table 5.6: Debt Payments - Aracruz Paper Plant


Beginning Debt

Interest expense

Principal Repaid

Total Payment

Ending Debt

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