Finding a NPV for a project that a company (BIKE) wants to do in a different industry (COKE)

Company makes bicycles but they want to start a project in the beverage industry

- 5 year project

- Initial investment = $250,000

- Partly funded by $110,000 in debt, debt has a 5 year maturity, annual coupon at 5%, and principal is repaid in a single payment at end of the 5 years

- 220 units will be sold at $550 per unit for each of the 5 years

- variable cost is $210 per unit

- tax rate of BIKE co is 25%

- depreciation will be straight line over 5 years, with 0 salvage

- NWC end of year 1 is $55,000 and end of year 2 is $60,000 and will go to zero at end of year 5

- Risk free rate = 4%

- Rm (market rate) = 11%

- Beta for BIKE = 1.4

A company in the beverage industry called COKE has:

- equity beta = 1.1

- B/S = 1

- tax rate = 30%

Find the NPV of this project and should the project be taken?