Question
assignment 2 QUESTION 6 Day Co. is considering a new project that requires an investment of $96 million in machinery. This is expected to produce
assignment 2
QUESTION 6
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Day Co. is considering a new project that requires an investment of $96 million in machinery. This is expected to produce sales of $120 million per year for 4 years. Operating expenses are 70% of sales. Operating expenses do not include depreciation. The machinery will be fully depreciated to a zero book value over 4 years using straight-line depreciation. At the end of year 4, they can sell the machine for $10 million. Working capital costs are negligible. The tax rate is 25%. The unlevered cost of capital is 11%.
a) Calculate the base case NPV (without debt).
b) Day plans to use $30,000,000 in bonds. The remaining funds will come from retained earnings. The bonds have a 4-year life, a coupon rate of 7% and a yield of 7%. Use the adjusted present value (APV) to find the value of the project. You do not need to rebalance the debt.
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