Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Mini Inc. is considering a new project. The equipment costs $42M, will be depreciated on a straight-line basis over 3 years to a zero-book value

Mini Inc. is considering a new project. The equipment costs $42M, will be depreciated on a straight-line basis over 3 years to a zero-book value and can be sold for 5M at the end of 3 years. It will generate net operating profit after taxes (NOPAT) of 4.5M per year for 3 years. There is no net working capital expenditure. The tax rate is 25%. The target debt ratio (D/V) is 30% debt and the rest from retained earnings. • They currently have 3-year debt that trades at a price of $970 per bond. The coupon rate is 5.95%, and coupons are annual. The face value is $1000. The before-tax cost on any new bonds will be the same as the yield to maturity on the current bonds. Any issue costs are negligible. • Analysts forecast a dividend of $4.75 for next year and the current price is $38 per share. The growth rate is 3%. Issue costs for common stock are 5%. 


a. Find the NPV of the project at the weighted average cost of capital (WACC). 


b. Based on the NPV, will they take the project? Explain.

Step by Step Solution

3.36 Rating (162 Votes )

There are 3 Steps involved in it

Step: 1

Part a Calculating NPV 1 Calculate the aftertax cash flows NOPAT 45M Tax rate 25 Aftertax profit NOPAT 1 Tax rate 45M 1 025 3375M 2 Calculate the depreciation expense Equipment cost 42M Depreciation p... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Advanced Accounting

Authors: Gail Fayerman

1st Canadian Edition

9781118774113, 1118774116, 111803791X, 978-1118037911

More Books

Students also viewed these Finance questions