Find the Modified Internal Rate of Return for Project C:

Info:

Applied Manufacturing, Inc. (AM) is a custom metal fabrication corporation providing a wide range of goods and services to its customers. For decades, AM has been a parts manufacturer and supplier to the aerospace and naval industries. They service both major manufacturers such as Nordam, Boeing, and Airbus, as well as the United States Government in contracts for both military aircraft and naval vessels. While the existing lines of business are profitable, senior leadership of the corporation is pushing for the creation of new lines of business that will generate new revenue streams that are not dependent on their existing clients. As part of its budgeting process for the next year, the senior leadership team has identified three mutually-exclusive projects which meet the strategic goals mentioned above. As a member of the senior leadership team, you have been assigned the task of performing a financial analysis of theseprojects to determine the appropriate valuation of each one. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm. Senior management has a preference in using the market values of the firm's capital structure and believes it current structure is optimal.

Balance Sheet

Cash1,789,298Accounts Payable and Accruals28,204,824

Accounts Receivable52,740,911Notes Payable48,240,305

Inventories70,670,223Long Term Debt77,260,000

Net Fixed Assets179,040,000Preferred Stock15,000,000

Common Equity135,535,303

Total Assets304,240,432Total liabilities and Equity304,240,432

Market Values of Capital:

The company has 81,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $899.24. You also have 150,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a 3.6% per share flotation cost. The company has 5 million shares of common stock outstanding with a currently price of $29.84 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with flotation costs of 6.7% per share.The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 13 percent. Your stock's beta is 1.18. Your firm does not use notes payable for long-term financing. Your firm's federal + state marginal tax rate is 28%. For all projects, the reinvestment rate shall be 9.5%

Project C:

This project is significantly outside of the normal products sold of the firm. The project is a reconsideration of a project proposed two years ago by a former manager. At that time a marketing study costing $200,000 was done; however, the project was not undertaken. Now the firm needs to consider if this project is worth the firm's capital investment dollars. This project would require investment in equipment of $20,000,000 with an additional cost of $5,000,000 in installation fees. The project will be depreciated using the MACRS schedule. At the end of the project, management estimates that the equipment could be sold at a market value of $5,000,000. This project also creates a need to increase raw goods inventory by $6,000,000. During the operational cycle of this project, the product would have a sales price of $90.00 per unit. Costs associated with this project would be $65.00 in variable cost per unit and a fixed cost per year of $5,000,000. Management estimates that the sales volume would be 500,000 units in year 1, 600,000 units in year 2, 700,000 units in year 3, 800,000 units in year 4, 800,000 units in year 5, and 600,000 units in year 6. Because management is uneasy with undertaking a project so far outside of its normal product portfolio, it is imposing a 3-percentage-point premium above the WACC as the required rate of return on the project. Modified Accelerated Cost Recovery System (MACRS) Ownership Year 5-Year Investment Class Depreciation Schedule 1 20% 2 32% 3 19% 4 12% 5 11% 6 6% Total = 100%