Aswath Damodaran 242
A Brief Example: A Paper Plant for Aracruz - Investment
Assumptions
The plant is expected to have a capacity of 750 , 000 tons and will have the
following characteristics:
! 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.
! 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).
! 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. At the end of the tenth year, the
plant is expected to be sold for its remaining book value.
This project differs from the Disney analysis on three dimensions:
The cash flows are in real terms.
The investment is a finite life investment
The analysis will be done in equity terms.
