A $6M investment is considered by an electric bike manufacturing company to add a new production line for its new product, electric skateboards. The company has commissioned an exploratory study of where to place the new production line and which type of equipment to use. There are three types of machines to choose from for the company to install on the new assembly line. The machines have zero salvage value at the end of 10-year planning horizon. The company must select at least two alternatives from (i) Loan, (ii) Common Stocks, (iii) Preferred Stocks, and (iv) Retained Earnings to obtain the required amount of capital for the investment. Each of these capital sources could provide $3M to support the project. The company is anticipating rapid product penetration and aggressive growth after addition of the new production line. The major question is to find out if the project is economically justified. (Slove only Parts 5,6 &7)

Step 1: Choose the Capital Sources and Calculate WACC

Based on the instruction provided to you, choose the appropriate options to form the capital for the investment, and the calculate WACC.

Options	Capital Sources	Description
1	Loan	Interest Rate = 8 %, Compounded Semi Annually Payback Method: Plan 3
2	Preferred Stock	Dividend = $7, Price = $100, Brokerage Fee = $1
3	Common Stock	Dividend = $5, Price = $100, Growth Rate = 4%
4	Retained Earning

Step 2: Calculate MARR. Set MARR equal to rounded WACC (Round up WACC) + 3% for your further analysis

Step 3: Choose the type of Machine and Calculate Before Tax Cash Flow (BTCF)

Choose one type of Machine from the following table and calculate the BTCF.

Options	1	2	3
No. of Machines	20	20	20
First Cost	$200,000	$250,000	$300,000
Operating Cost/Hr.	$100	$120	$150
Revenue/Hr.	170	190	210
Hr./Year	1500Hrs.	1700Hrs.	1800Hrs.
Useful Life	10Years	10Years	10Years
Depreciation (MACRS)	5Years	7Years	7Years

Step 4: Economic worth calculation

Find (i) PW, (ii) DPBP, (iii) IRR based on BTCF.

Step 5: Tax Rate

Choose one set of the tax rates from the following table and find the overall tax rate

Options	State Tax Rate	Federal Tax Rate
1	8%	20%
2	7%	21%
3	9%	19%

Step 6: After tax Calculation

construct the After-Tax Cash Flow (ATCF) and then calculate the corresponding (i) PW, (ii) AW,

and (iii) IRR for the ATCF.

Step 7: Choose Inflation and calculate ATCF

Choose the appropriate value for the Inflation rate from the following table and calculate (i)

PW, (ii) ERR and (iii) IRR based on ATCF.

Options	Inflation rate
1	4%
2	5%
3	6%