As a financial analyst at Dell, you are considering an investment in short horizon project that will better handle inventory in Dell's shipping department. The inventory handling machine cost $1,000 and will last four years. The expected salvage value of the new machine is at t=4 is $200. Dell will depreciate the machine using straight- line method over 4 years (depreciating down to the $200 salvage value). The project will reduce expenses by $400 each year. Initial net working capital already in place at t=0 is $200. The new machine will reduce the net working capital by $50 at t=0 and then another reduction of $50 at t-2. There are no other working capital effects, recoveries or otherwise. Asset betas of similar projects are 2.0. The expected market return is 10% and the risk free rate is 5%. A bank will finance the debt portion of the project at 6%. The equity beta is 3.2 and the debt beta is 0.2. The tax rate is 40%. a) Assume that the project will maintain a constant debt to value ratio of 0.4. Use the APV method to calculate the NPV of this new project. b) Next, change the assumption about the debt. Suppose that the bank makes a take it or leave it offer that the principal amount of the debt must follow this schedule: $500 at t=0; $400 at t=1; $300 at t=2; $200 at t-3; $0 att-4. The firm accepts this deal. What is the NPV of the new project? c) Next, your boss tells you to calculate the NPV for (a) and (b) using the after-tax WACC. Is there a short-cut (time-saving) way to the answer you can give her? If so, explain. As a financial analyst at Dell, you are considering an investment in short horizon project that will better handle inventory in Dell's shipping department. The inventory handling machine cost $1,000 and will last four years. The expected salvage value of the new machine is at t=4 is $200. Dell will depreciate the machine using straight- line method over 4 years (depreciating down to the $200 salvage value). The project will reduce expenses by $400 each year. Initial net working capital already in place at t=0 is $200. The new machine will reduce the net working capital by $50 at t=0 and then another reduction of $50 at t-2. There are no other working capital effects, recoveries or otherwise. Asset betas of similar projects are 2.0. The expected market return is 10% and the risk free rate is 5%. A bank will finance the debt portion of the project at 6%. The equity beta is 3.2 and the debt beta is 0.2. The tax rate is 40%. a) Assume that the project will maintain a constant debt to value ratio of 0.4. Use the APV method to calculate the NPV of this new project. b) Next, change the assumption about the debt. Suppose that the bank makes a take it or leave it offer that the principal amount of the debt must follow this schedule: $500 at t=0; $400 at t=1; $300 at t=2; $200 at t-3; $0 att-4. The firm accepts this deal. What is the NPV of the new project? c) Next, your boss tells you to calculate the NPV for (a) and (b) using the after-tax WACC. Is there a short-cut (time-saving) way to the answer you can give her? If so, explain
