Exercices

As the director of a firm's capital budgeting department, you have been asked to evaluate a project. After collecting information from various sources, you have determined the following:

The project requires the use of equipment valued at $$8,000,000,$ using the straight$-$line depreciation method in $5$ years. The project$$s life is $4$ years. You anticipate that the equipment can be sold in four years for $$2,000,000.$ Anticipated sales are $1,000,000$ units per year based on a sale price of $$13$ per unit. The cost of producing each unit is $$9\mathrm{.}50.$ If the project is accepted, the firm will need to hire an additional manager with an annual salary of $$80,000.$ The product affect to another of the firm's products. As a result, you anticipate decreased sales of $$500,000$ per year for that product. Total research $($information gathering for project analysis$)$ expenses to date are $$26,000.$ The firm's marginal tax rate is $20\%.$ The risk of this project is similar to the risk of the company.

The firm's preferred stock pays a constant annual dividend of $$2\mathrm{.}25$ and is currently selling for $$20.$ The firm is expected to pay a common stock dividend of $$3\mathrm{.}6$ in one year, with anticipated growth of $2\%$ each year thereafter. Currently, the common stock is selling at a net price of $$24.$ The firm has $8$ year bonds outstanding with a coupon rate of $8\mathrm{.}75\%,$ paid annually. The bonds are currently selling at par. The firm is currently being financed with $$10,000,000$ of debt, $$25,000,000$ of common equity, and $$5,000,000$ of preferred stock.

Requirements:

a$.$ What is the WACC of this project?

b$.$ Calculate the NPV of this project and answer that whether the project can be accepted?

c$.$ If the project is accepted, the firm will have to forego another $5$ years life project that has a NPV of $$10,584,000.$ Evaluate this decision?