Part 2 Project Analysis ABC Company is considering adding a new line to its product mix and you have been asked to complete the capital budgeting. The production line would be set up in unused space in the main plant. The machinerys invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and ABC Company has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 12% of sales revenues. The CFO has provided you with the following data, which she believes may be relevant to your task: The firms tax rate is 40%. The current price of ABCs 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. The current price of the firms 10%, $100 par value, annual dividend, perpetual preferred stock is $116.95. ABCs common stock is currently selling at $50 per share. The stock beta is 1.2, the yield on T-bonds is 2.6% (this is the risk-free rate), and the market risk premium is estimated to be 7%. ABCs target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. You should determine the firms WACC and analyze this project to help determine whether ABC Company should proceed. Summarize your findings in a report back to the CFO. Be sure to justify you recommendations with solid analysis.

Balance Sheets Assets Cash Short-term investments Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets 2016 9,000 48,600 351,200 715,200 $ 1,124,000 491,000 146,200 $ 344,800 $ 1,468,800 2017 7,282 20,000 632,160 1,287,360 $ 1,946,802 1,202,950 263,160 $ 939,790 $ 2,886,592 2018 14,000 71,632 878,000 1,716,480 $ 2,680,112 1,220,000 383,160 $ 836,840 $ 3,516,952 Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities and equity 2016 $ 145,600 200,000 136,000 481,600 323,432 460,000 203,768 $ 663,768 $ 1,468,800 2017 324,000 720,000 284,960 $ 1,328,960 1,000,000 460,000 97,632 $ 557,632 $ 2,886,592 2018 359,800 300,000 380,000 $ 1,039,800 500,000 1,680,936 296,216 $ 1,977,152 $ 3,516,952 Income Statements Sales Cost of goods sold Depreciation and amortization Other expenses Total operating costs EBIT Interest expense Taxable income Taxes Net income 2016 $ 3,432,000 2,864,000 18,900 340,000 $ 3,222,900 209,100 62,500 $ 146,600 58,640 87,960 2017 $ 5,834,400 4,980,000 116,960 720,000 $ 5,816,960 $ 17,440 176,000 (158,560) (63,424) $ (95,136) 2018 $ 7,035,600 5,800,000 120,000 612,960 $ 6,532,960 $ 502,640 80,000 $ 422,640 169,056 $ 253,584 S 209 10 Balance Sheets Assets Cash Short-term investments Accounts receivable Inventories Total current assets Gross fixed assets Less: Accumulated depreciation Net fixed assets Total assets 2016 9,000 48,600 351,200 715,200 $ 1,124,000 491,000 146,200 $ 344,800 $ 1,468,800 2017 7,282 20,000 632,160 1,287,360 $ 1,946,802 1,202,950 263,160 $ 939,790 $ 2,886,592 2018 14,000 71,632 878,000 1,716,480 $ 2,680,112 1,220,000 383,160 $ 836,840 $ 3,516,952 Liabilities and Equity Accounts payable Notes payable Accruals Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities and equity 2016 $ 145,600 200,000 136,000 481,600 323,432 460,000 203,768 $ 663,768 $ 1,468,800 2017 324,000 720,000 284,960 $ 1,328,960 1,000,000 460,000 97,632 $ 557,632 $ 2,886,592 2018 359,800 300,000 380,000 $ 1,039,800 500,000 1,680,936 296,216 $ 1,977,152 $ 3,516,952 Income Statements Sales Cost of goods sold Depreciation and amortization Other expenses Total operating costs EBIT Interest expense Taxable income Taxes Net income 2016 $ 3,432,000 2,864,000 18,900 340,000 $ 3,222,900 209,100 62,500 $ 146,600 58,640 87,960 2017 $ 5,834,400 4,980,000 116,960 720,000 $ 5,816,960 $ 17,440 176,000 (158,560) (63,424) $ (95,136) 2018 $ 7,035,600 5,800,000 120,000 612,960 $ 6,532,960 $ 502,640 80,000 $ 422,640 169,056 $ 253,584 S 209 10