Dr. Chris Piker is evaluating the merits of a potential investment in a blueberry farm. He already owns the land for the farm, but he would need to purchase the blueberry bushes for $50,000 and a tractor for S65,000. The tractor falls into the MACRS 5-year class (refer to the table in the Appendix to Chapter 11), and it will cost S10,000 to modify it for Dr. Piker's particular needs. A surveyor, who charged Dr. Piker $3,000 for his services, already approved the land as a fertile site for a blueberry farm The farm requires additional net working capital of $5,000. The blueberry bushes are expected to yield before-tax revenues of $50,000 per year with operating costs of $15,000 per year. Dr. Piker expects the tractor to be used for 5 years and then sold for $20,000. Dr. Piker has asked you to evaluate his proposed project, and he has provided you with the following information about the investment: Dr. Piker has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. He plans to issue bonds with a 5% coupon, paid semiannually, a maturity of 10 years, and sell them for $1,000. He also believes that he could sell, at par, $100 preferred stock that pays a 6% annual dividend, but flotation costs of 4% would be incurred. He estimates the beta of this project to be 0.75, the risk-free rate is 3%, and the expected return on the market portfolio is 15%. Dr. Piker plans to issue shares of common stock for $42 apiece, with an initial dividend of $2.10 that is expected to show constant growth of 5%. He uses a risk premium of 3% when using the bond-yield-plus- risk-premium method to find the cost of equity. His estimated marginal tax rate is 30%. In addition to finding the firm's average-risk cost of capital, Dr. Piker has also asked you to calculate a risk-adjusted cost of capital. He believes that the project's cash flows for years 1 through 5 will increase by 5% in a particularly good market, and the ca$h flows will decrease by 5% in a particularly bad market. He estimates that there is a 25% probability of a good market occurring, a 30% probability of a bad market occurring, and a 45% probability of an "average" market occurring. To complete this task of calculating a risk-adjusted cost of capital, you will need to find the expected NPV, its standard deviation, and its coefficient of variation (CV). Dr. Piker informs you that his average project has a CV in the range of 1.2 to 1.8. Ifthe CV of a project being evaluated is greater than 1.8, 2 percentage points are added to the cost of capital for the evaluation. Similarly, if the CV is less than 1.2, 1 percentage point is deducted from the cost of capital for the evaluation. In the end, Dr. Chris Piker wants to know whether to accept or reject the project. He expects you to make your conclusion using 3 techniques: discounted payback method, NPV analysis, and IRR analysis Throughout your analysis, you are to be as thorough as possible, documenting all of your work to support your conclusions. To do so, you should include (at a bare minimum) the following calculations 1) Dr. Piker's WACC for an average-risk project 2 Annual cash flow estimates for the project (including the initial outlay) 3) A risk-adjusted cost of capital for this project 4) An accept/reject decision based on the above 3 techniques Dr. Chris Piker is evaluating the merits of a potential investment in a blueberry farm. He already owns the land for the farm, but he would need to purchase the blueberry bushes for $50,000 and a tractor for S65,000. The tractor falls into the MACRS 5-year class (refer to the table in the Appendix to Chapter 11), and it will cost S10,000 to modify it for Dr. Piker's particular needs. A surveyor, who charged Dr. Piker $3,000 for his services, already approved the land as a fertile site for a blueberry farm The farm requires additional net working capital of $5,000. The blueberry bushes are expected to yield before-tax revenues of $50,000 per year with operating costs of $15,000 per year. Dr. Piker expects the tractor to be used for 5 years and then sold for $20,000. Dr. Piker has asked you to evaluate his proposed project, and he has provided you with the following information about the investment: Dr. Piker has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. He plans to issue bonds with a 5% coupon, paid semiannually, a maturity of 10 years, and sell them for $1,000. He also believes that he could sell, at par, $100 preferred stock that pays a 6% annual dividend, but flotation costs of 4% would be incurred. He estimates the beta of this project to be 0.75, the risk-free rate is 3%, and the expected return on the market portfolio is 15%. Dr. Piker plans to issue shares of common stock for $42 apiece, with an initial dividend of $2.10 that is expected to show constant growth of 5%. He uses a risk premium of 3% when using the bond-yield-plus- risk-premium method to find the cost of equity. His estimated marginal tax rate is 30%. In addition to finding the firm's average-risk cost of capital, Dr. Piker has also asked you to calculate a risk-adjusted cost of capital. He believes that the project's cash flows for years 1 through 5 will increase by 5% in a particularly good market, and the ca$h flows will decrease by 5% in a particularly bad market. He estimates that there is a 25% probability of a good market occurring, a 30% probability of a bad market occurring, and a 45% probability of an "average" market occurring. To complete this task of calculating a risk-adjusted cost of capital, you will need to find the expected NPV, its standard deviation, and its coefficient of variation (CV). Dr. Piker informs you that his average project has a CV in the range of 1.2 to 1.8. Ifthe CV of a project being evaluated is greater than 1.8, 2 percentage points are added to the cost of capital for the evaluation. Similarly, if the CV is less than 1.2, 1 percentage point is deducted from the cost of capital for the evaluation. In the end, Dr. Chris Piker wants to know whether to accept or reject the project. He expects you to make your conclusion using 3 techniques: discounted payback method, NPV analysis, and IRR analysis Throughout your analysis, you are to be as thorough as possible, documenting all of your work to support your conclusions. To do so, you should include (at a bare minimum) the following calculations 1) Dr. Piker's WACC for an average-risk project 2 Annual cash flow estimates for the project (including the initial outlay) 3) A risk-adjusted cost of capital for this project 4) An accept/reject decision based on the above 3 techniques