Assignment: You are interested in proposing a new venture to the management of your company. Pertinent financial information is given below.

Balance Sheet

Cash	5,000,000	Accounts Payable and Accruals	13,000,000
Accounts Receivable	24,000,000	Notes Payable	43,000,000
Inventories	39,000,000	Long Term Debt	52,000,000
		Preferred Stock	9,000,000
Net Fixed Assets	125,000,000	Common Equity	76,000,000
Total Assets	193,000,000	Total Liability & Owners' Equity	193,000,000

Last year's sales were $170,000,000

The company has 61,500 30-year bonds outstanding, with 15 years until maturity. The bons carry a 9 percent semi-annual coupon, and are currently selling for $975

You also have 100,000 shares of perpetual preferred stock outstanding, which pays a dividend of $8.00 per share. The current market price is $97.00

The company has 6.55 million shares of common stock oustanding with a current price of $18 per share. The stock exhibits a constant growth of 8.2 percent. The last dividend (D0) was $.97 per share.

Your firm does not use notes payable for long-term financing.

Your firm's federal + state marginal tax rate is 31%

The firm has the following investment opportunities currently available in addition to the enture that you are proposing:

Project	Cost	IRR
A	18,000,000	22%
B	25,000,000	18%
C	17,000,000	14%
D	32,000,000	11%
E	15,000,000	8%

All projects, including Project I, are assumed to be of average risk. Your venture will consist of a new product introduction (You should label your venture as Project I, for "introduction"). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. The resulting MACRS depreciation percentages for year 1 through 6, respectively, are 20%, 32%, 19%, 12%, 11%, and 6%. Your venture would require a capital investment of $18,200,000 in equipment, plus $1,100,000 installment costs. The venture would also result in an increase in accounts receivable and inventories of $3,000,000. At the end of six-year life span of the venture, you estimate that the equipment could be sold at a $5,100,000 salvage value. Your venture would incur fixed costs of $1,350,000 per year, while the variable costs of the venture would equal 28 percent of revenues. You are projecting that revenues generated by the project would equal $8,100,000 in year 1, $15,400,000 in year 2, $16,000,000 in year 3, $16,700,000 in year 4, $11,000,000 in year 5, and $7,000,000 in year 6.

The following list of steps provides a structure that you should use in analyzing your new venture. Note: Carry all final calculations to two decimals.

1.) Find the cost of the individual capital components.

A.) Long-Term Debt

I believe the following is the correct answer:

6.42% Long Term Debt

4.6563% Semi Annual Rate

9.3100% Annual cost of Debt (4.6563%*2)

Calculations using rate formula in Excel:

Nper= 30 (15 years in terms of semi annual periods)

PMT = Coupon payment = 9% of 1000 = 90 (annual) = 45 (Semi Annual)

FV = 1,000

After tax cost of debt = 9.31% (1-tax rate) = 9.31*(1-31) = 6.42%

B.) Preferred Stock

I believe the following is the correct answer:

8.2474%

= Dividend/Market Price (8/97)

C.) Retained earnings (Using DCF approach)

I believe the following is the correct answer:

14.03%

Cost of equity as per DCF = D1/P0+g

D1=dividend next year = .97*1.082=1.04954%

P0=18

G=8.2%=.082

Cost of equity = 1.04954/18+.082=.1403=14.03%

2.) Determine the weighted average cost of capital.

I believe the correct answer is 7.60%

WACC = WeRE+WpRp+WdRd (1-.31)

We = 15.2% = .152

Re = 14.03%

Wp= 1.1% = .011

Rp = 8.2474%

Wd= 83.7% =0.837

Rd = 6.42%

WACC=(.152*14.03%)+(.011*8.2474%)+(.837*6.42%)

3.) Compute the Year 0 investment for Project I.

I believed the following is the correct answer:

-$22,300,000

Investment of Equipment ($18,200,000)

Installment Costs ($1,100,000)

Initial Investment ($19,300,000)

NWC Change ($3,000,000)

Total Year 0 Investment ($22,300,000)

4.) Compute the annual operating cash flows for years 1-6 of the project.

I believe the following are correct:

Year 1		Year 2		Year 3
Revenues	$8,100,000	Revenues	$15,400,000	Revenues	$16,000,000
Fixed Costs	$1,350,000	Fixed Costs	$1,350,000	Fixed Costs	$1,350,000
Variable Costs	$2,268,000	Variable Costs	$4,312,000	Variable Costs	$4,480,000
Depreciation	$3,860,000	Depreciation	$6,176,000	Depreciation	$3,667,000
EBIT	$622,000	EBIT	$3,562,000	EBIT	$6,503,000
Tax (31%)	$192,820	Tax (31%)	$1,104,220	Tax (31%)	$2,015,930
NI	$429,180	NI	$2,457,780	NI	$4,487,070
EBIT	$622,000	EBIT	$3,562,000	EBIT	$6,503,000
+ Depreciation	$3,860,000	+ Depreciation	$6,176,000	+ Depreciation	$3,667,000
- Taxes	$192,820	- Taxes	$1,104,220	- Taxes	$2,015,930
OCF	$4,289,180	OCF	$8,633,780	OCF	$8,154,070
Year 4		Year 5		Year 6
Revenues	$16,700,000	Revenues	$11,000,000	Revenues	$7,000,000
Fixed Costs	$1,350,000	Fixed Costs	$1,350,000	Fixed Costs	$1,350,000
Variable Costs	$4,676,000	Variable Costs	$3,080,000	Variable Costs	$1,960,000
Depreciation	$2,316,000	Depreciation	$2,123,000	Depreciation	$1,158,000
EBIT	$8,358,000	EBIT	$4,447,000	EBIT	$2,532,000
Tax (31%)	$2,590,980	Tax (31%)	$1,378,570	Tax (31%)	$784,920
NI	$5,767,020	NI		NI	$1,747,080
EBIT	$8,358,000	EBIT	$4,447,000	EBIT	$2,532,000
+ Depreciation	$2,316,000	+ Depreciation	$2,123,000	+ Depreciation	$1,158,000
- Taxes	$2,590,980	- Taxes	$1,378,570	- Taxes	$784,920
OCF	$8,083,020	OCF	$5,191,430	OCF	$2,905,080

5.) Compute the non-operating (terminal) cash flow at the end of year 6.

I believe the following is correct:

Year 6 Terminal Total
Salvage Value	$5,100,000
Book Value	$0
Taxable Gain	$1,581,000
After Tax Salvage Value	$3,519,000
NWC (Inflow)	+$5,100,000
Year 6 Terminal Total:	$6,681,000

6.) Draw a timeline that summarizes all of the cash flows for your venture.

Year	0	1	2	3	4	5	6
Initial Cost	($19,300,000)
Change in NWC	($3,000,000)						$3,000,000
OCFs		$4,289,180	$8,633,780	$8,154,070	$8,083,020	$5,191,430	$2,905,080
CF for Salvage							$3,519,000
Total CFs	($22,300,000)	$4,289,180	$8,633,780	$8,154,070	$8,083,020	$5,191,430	$9,424,080

7.) Compute the IRR, Payback, and NPV for Project I.

NPV using WACC rate of 7.60%

Year (n)	Cash Flow
0	($22,300,000)
1	$4,289,180
2	$8,633,780
3	$8,154,070
4	$8,083,020
5	$5,191,430
6	$2,905,080
NPV =	$7,190,230.96

IRR using WAC rate of 7.60%

Year (n)	Cash Flow
0	($22,300,000)
1	$4,289,180
2	$8,633,780
3	$8,154,070
4	$8,083,020
5	$5,191,430
6	$2,905,080
IRR	18.02%

Payback

Payback	$24,400,000
Year 1	$4,289,180
Payback	$20,110,820
Year 2	$8,633,780
Payback	$11,477,040
Year 3	$8,154,070
Payback	$3,322,970
Year 4	$8,083,020
Payback	0.4111
Total Years Payback	3.4100

8.) Prepare a report for the firms CEO indicating which projects should be accepted and why.

Im really looking for some help in reviewing my project so far, and providing some guidance on the requirements of question #8 in this project. I've asked my instructor for feedback on where I'm at on my project and have not been able to receive this. I'd like an idea before I start making recommendations. Also, based on only given the Cost and IRR for the additional projects, we weren't given a minimum return rate so do you just compare the IRR of Project I, with initial investment cost of $19,300,000 to the costs listed for each project and the IRR of 18.02%?