1 Photochronograph Corporation (PC), a large and fast growing publicly traded firm, manufactures time series photographic equipment. Suppose the company hired you as a financial 2 consultant to consider expending its business internationally. The plan is to build a new manufacturing facility in Guangdong, China where the company bought some land back 3 2017 for $7.15 million. If the land were sold today, the net proceeds would be $10.25 million after taxes. The company wants to build its new manufacturing facility on this land; the 4 facility will cost $16.5 million to build. The following market data on PC's securities are current: 5 Debt: 53,100 7.8 percent coupon bonds outstanding, 23 years to maturity, selling for 98 percent of par; the bonds have a $1,000 par value each and make semiannual payments. 6 Common stock: 925,500 shares outstanding, selling for $105 per share; the beta is 1.10. 7 Preferred stock: 45,200 shares of 7.10 percent preferred stock outstanding, selling for $102 per share. 8 9 Market: 8.5 percent expected market risk premium; 2.00 percent risk-free rate. 10 11 PC's tax rate is 21 percent. 12 13 14 1. The new project is somewhat riskier than a typical project for PC, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 15 +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating PC's project (9 Points) 2. The manufacturing facility is a six-year project, and PC uses 5-year MACRS to depreciate the plant to a book value of zero. At the end of the project, the facility can be scrapped for $ 0.85 million. What is the after-tax salvage value of this manufacturing facility? (4 points) Year 1 2 3 4 5-year 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% 5 6 3. The company will incur $8,187,500 in annual fixed costs. The plan is to manufacture 3,800 time-series photographic equipment and sell them at $25,750 per machine to start, but When the competition catches up after two years, PC anticipates that the price will drop to $24,850 and yearly sales shows in below table. Moreover, the variable production costs are $20,860 per equipment. What is the annual operating cash flow, OCF, from this project? (8 Points) Year 1 2 3 Unit Sales 3,800 3,890 4,000 4,100 4,000 4,050 4 5 6 9 0 4. The project requires $615,000 in initial networking capital investment at the start. Subsequently, total net working capital at the end of each year will be about 10 percent of sales for that year. What is the NPV of this project? What is the project's IRR? (9 points/question) 3 4 35. You feel that both sales and fixed costs are accurate to +/-5 percent. What are the NPVs and IRRs of this project for both the best and the worst-case scenarios? Hint: use Scenario 34 Manager function in Excel to conduct this analysis (10 points) 35 36