1) What do i have input in cashflow?
2) How can i calculate the entire cost of capital?
3) How to calculate the NPV, IRR & Payback Period?
Singapore Industries Water Heater You work in the Finance department of Singapore Industries. In the fall of each year you evaluate all the capital investment projects under consideration by the company and make recommendations as to whether the rm should pursue them. The evaluation of all these projects under consideration needs to be completed. This is a new water heater product which has signicantly greater energy eiciency capabilities when compared to current market products. We offer products directed toward the home and apartment market but have not ventured into the water heater segment of this market as of yet. Our company has entered into an agreement with a small entrepreneurial company called Energy One to purchase the sole rights to utilize their energy eicient technological breakthrough in your new water heaters. The contract is conditional upon your board approving the best of these projects. The Research & Development department has completed the design prototype at a cost of $750,000 and it is ready for production. To introduce this product line will require the purchase of additional production capacity which can be built and paid for during 2021 and ready to begin production on lanuary 1, 2022. The cost to develop this capacity will be $70,950,000. It is estimated that $400,000 of additional net working capital will be needed to implement the project. All parties working on this project agree the level of risk involved is higher than the average risk of projects the company normally undertakes due to the newness of the technology involved. bapital Investment Criteria: The board of directors has adopted the following criteria to be used in evaluating all capital investment projects: - Payback period may not exceed 4 years. 0 N'PV must be positive using the nns weighted average cost of capital. I [RR must at least exceed the rms cost of capital. 0 When projects represent greater than average risk, a 2% adjustment to the cost of capital as well as the minimum IRR must be applied. It a project represents less than average risk, the cost of capital and [RR could also be reduced by 2%. When available capital is insuicient to pursue all m which meet the above criteria, the project(s) which provides the largest impact to shareholder value will be adopted until the maximum amount available is fully utilized. You have been informed that $144 million is the maximum amount of capital investment the rm is willing to consider this year. Investments up to that amount will not result in any increase in the marginal cost of capital. Singapore Industries - Water Heater work sheet Proforma Income/ Expense Statement 2021 2022 2023 2024 2025 2026 Total Projected Sales $84,075,000 $96,692,109 $110,280,668 $124,908,153 $140,635,887 Total Cost of Goods Sold $59,000,000 $67,521,960 $76,636,280 $86,375,950 $96,776,302 Gross Margin $25,075,000 $29,170,149 $33,644,388 $38,532,203 $43,859,585 Marketing $3,000,000 $3,090,000 $3,182,700 $3,278,181 $3,376,526 Administrative Cost $5,000,000 $5,150,000 $5,304,500 $5,463,635 $5,627,544 Depreciation * $14,190,000 $14,190,000 $14,190,000 $14,190,000 $14,190,000 Net Operating Income $2,885,000 $6,740,149 $10,967,188 $15,600,387 $20,665,515 Taxes at35% $1,009,750 $2,359,052 $3,838,516 $5,460,135 $7,232,930 Net Income $1,875,250 $4,381,097 $7,128,672 $10,140,252 $13,432,585 *The plant & equipment can be sold for $400,000 on 12/31/2026 even though it is fully depreciated. List & label all relevant additional cash flows in year incurred: 2021 2022 2023 2024 2025 2026 a b. d e. Total Cash flows = Current Price After Tax Cost Weight (00.00%) Weighted Cost Cost of Capital Total Amount* per bond (00.00%) (00.00%) Bonds (carry out to 2 decimals 9.56% or.0956) " $9,000,000,000 $611.84 Equity (Common Stock) $10,002,000,000 $40.85 Total long term liabilities & equity $19,002,000,000 Weighted Cost of Capital = Risk Weighted Cost of Capital = All the bonds have a face value of $1,000, a coupon rate of 7% and will mature in 20 years "The common stock pays a yearly dividend of $5.00 per share and is expected to grow 3% each year Net Present Value = IRR = Payback Period =
