A firm producing computers considers a new investment which is about opening a new plant.

The projects lifetime is estimated as 5 years and requires 22 million $ as investment cost. Salvage value of the project is estimated as 4 million $ (which will be received in the sixth year) However the firm prefers to show salvage value only as 2 million $. The firm uses 5-year straight-line depreciation.

It is estimated that the sales will be 12 million $ next year and then sales will grow by 20% each year.

It is estimated that fixed costs will be 1.5 million next year and then will grow by 5% each year.

Variable costs are projected %10 of sales each year.

This project, in addition, requires a working capital of $ 3 million in the first year, 4 million in the second year, 4 million in the third year, 3 million in the fourth year and 1.5 million in the fifth year.

Firm plans to use a debt/equity ratio of %50 in this project.

The company can borrow $ loan with an interest cost of 14% before tax. Corporate tax rate is 20%. The shares of this company in NYSE are selling at 8 $ and the stocks have approximately market risk and have a strong correlation with NYSE index. 10- year government bond yields at %12 and market risk premium is %8.

Given this information; find the NPV and IRR of the project; is this project feasible or not?

What is the result of higher WACC ? Can a company reduce its WACC ? If yes, how? Give numerical example related with this project and explain this topic briefly regarding to the capital structure theories.

Please solve this CLEARLY

Andrew Jim Moore. UC Berkeley.