Green Energy Ltd. has a target capital structure that consists of 55 percent debt. 10 percent preferred stock and 35 percent equity. The companys 9% debentures have 20 years to maturity and are currently selling at $1 025. The 13% preferred stock has a $10 par value and is currently being traded at $15. The companys common stock trades at $30 a share its current dividend of $3 per share is expected to grow at a constant rate of 7% per year. The tax rate is 32%

Green Energy Ltd. are considering the introduction of a component, the Zero Waste, which significantly increase fuel efficiency in motor vehicles. To produce the component the company would have to acquire new equipment. This equipment would cost $300 000, with installation costs of $20 000, and be usable for 10 years, after which it would have a salvage value equal to 5% of the original purchase cost. Production and sale of the component would require a working capital investment of $45 000 to finance accounts receivable, inventories and day to day cash receipts.

Sales in the first year are expected to be $750 000 and this is expected to grow by an average of 4% for each year of the projects life. Variable costs for production, administration and sales will be $225 000 per year (these costs are expected to vary proportionately). Advertising costs are expected to be $200 000 annually for the first two years, after which these costs are expected to amount to $75 000 per year. Other fixed costs will total $80 000 per year (including depreciation of $30,500).

Required

a) Compute the cost of capital to be used to discount the projects cash flows

b) Compute the relevant after-tax net cash flows of the project.

c) Using Excel, compute the following:

i. Discounted Payback

ii. NPV

iii. PI

iv. IRR

v. MIR