Problem: Capital Budgeting and Valuation
Netflix.shop is contemplating a partnership with Alibaba-the e-commerce company-to get a stronger foothold in China. The project entails the following projections:
1. An initial investment of $100 million.
2. Revenue of $200 million in 2022, with 10% growth per year until 2026, and 3% per annum afterwards. So, 2021 is Year 0, 2022 is Year 1 and Terminal Value is after 2026.
3. Operating income margin of 4% in the first four years, and 5% per annum afterwards.
4. Working capital / sales of 5% per year i.e., on average, the level of working capital is 5% of sales. Working capital in year 0 (2021) is $0.
5. No additional capital expenditure and no depreciation/amortization.
6. Assume 21% as corporate tax rate.
To determine the WACC, you are given the following information:
1. Netflix's overall WACC is 8%
2. Netflix's WACC for merchandising in North America is 7%.
3. Netflix estimates that any venture, streaming or merchandising, in Southeast Asia (including China) commands an incremental WACC of 4% over the same venture in North America.
• Assuming there are no financing constraints, should you go forward with the project or not? Justify your answer with numerical values.