Please answer this questions using the following options:
Capital Source: Option 4 & 1
Machine: Option 1
Tax Rate: Option 1
Inflation: Option 2
Please use Excel to solve the steps
Consider Loan (Capital Source: Option 1) as the 2nd option for the Capital source
For BTCF, consider the PPMT, IPMT and the Depreciation before obtaining the BTCF
For calculation of IPMT & PPMT, make use of the effective interest rate
A $6M investment is considered by an electric bike manufacturing company to add a new production line for its new product, electric skateboards. The company has commissioned an exploratory study of where to place the new production line and which type of equipment to use. There are three types of machines to choose from for the company to install on the new assembly line. The machines have zero salvage value at the end of 10-year planning horizon. The company must select at least two alternatives from (i) Loan, (ii) Common Stocks, (ii) Preferred Stocks, and (iv) Retained Earnings to obtain the required amount of capital for the investment. Each of these capital sources could provide $3M to support the project. The company is anticipating rapid product penetration and aggressive growth after addition of the new production line. The major question for this case study is to find out if the project is economically justified Part I: Cash Flow Construction Please follow this step to create the cash flow of the project and obtain its economic worth Step 1 Choose the Capital Sources and Calculate WACC Based on the instruction provided to you, choose the appropriate options to form the capital for the investment, and the calculate WACC. Options Capital Sources Description Interest Rate 8 %, Compounded Semi Annually Payback Method: Plan 3 Dividend $7, Price = $100, Brokerage Fee = $1 Dividend $5, Price = $100, Growth Rate = 4% 1 Loan Preferred Stock 2 Common Stock Retained Earning 4 Step 2: Calculate MARR Set MARR equal to rounded WACC (Round up WACC)+3 % for your further analysis Step 3: Choose the type of Machine and Calculate Before Tax Cash Flow (BTCF) Choose one type of Machine from the following table and calculate the BTCF. Options 1 3 No. of Machines 20 20 20 $300,000 $200,000 $250,000 $120 $190 First Cost Operating Cost/Hr Revenue/Hr. $100 $150 $210 $170 1500 Hrs. 1700 Hrs 1800 Hrs Hr./Year Useful Life Depreciation (MACRS) 10 Years 10 Years 10 Years 5 Years 7 Years 7 Years Step 4: Economic worth calculation on BTCF Find () PW, (i) DPBP, (ii) IR based Step 5: Tax rate Choose one set of the tax rates from the following table and find the overall tax rate for your project Options State Tax Rate Federal Tax Rate 1 8% 20% 2 7% 21% 9% 19% Step 6: After tax calculation construct the After-Tax Cash Flow (ATCF) and then calculate the corresponding (i) PW, (ii) AW and (ili) IRR for the ATCF Step 7: Choose Inflation and calculate ATCF Choose the appropriate value for the Inflation rate from the following table and calculate () PW, (i) ERR and (i IRR based on ATCF Options Inflation Rate 1 4% 2 5% 3 6% m A $6M investment is considered by an electric bike manufacturing company to add a new production line for its new product, electric skateboards. The company has commissioned an exploratory study of where to place the new production line and which type of equipment to use. There are three types of machines to choose from for the company to install on the new assembly line. The machines have zero salvage value at the end of 10-year planning horizon. The company must select at least two alternatives from (i) Loan, (ii) Common Stocks, (ii) Preferred Stocks, and (iv) Retained Earnings to obtain the required amount of capital for the investment. Each of these capital sources could provide $3M to support the project. The company is anticipating rapid product penetration and aggressive growth after addition of the new production line. The major question for this case study is to find out if the project is economically justified Part I: Cash Flow Construction Please follow this step to create the cash flow of the project and obtain its economic worth Step 1 Choose the Capital Sources and Calculate WACC Based on the instruction provided to you, choose the appropriate options to form the capital for the investment, and the calculate WACC. Options Capital Sources Description Interest Rate 8 %, Compounded Semi Annually Payback Method: Plan 3 Dividend $7, Price = $100, Brokerage Fee = $1 Dividend $5, Price = $100, Growth Rate = 4% 1 Loan Preferred Stock 2 Common Stock Retained Earning 4 Step 2: Calculate MARR Set MARR equal to rounded WACC (Round up WACC)+3 % for your further analysis Step 3: Choose the type of Machine and Calculate Before Tax Cash Flow (BTCF) Choose one type of Machine from the following table and calculate the BTCF. Options 1 3 No. of Machines 20 20 20 $300,000 $200,000 $250,000 $120 $190 First Cost Operating Cost/Hr Revenue/Hr. $100 $150 $210 $170 1500 Hrs. 1700 Hrs 1800 Hrs Hr./Year Useful Life Depreciation (MACRS) 10 Years 10 Years 10 Years 5 Years 7 Years 7 Years Step 4: Economic worth calculation on BTCF Find () PW, (i) DPBP, (ii) IR based Step 5: Tax rate Choose one set of the tax rates from the following table and find the overall tax rate for your project Options State Tax Rate Federal Tax Rate 1 8% 20% 2 7% 21% 9% 19% Step 6: After tax calculation construct the After-Tax Cash Flow (ATCF) and then calculate the corresponding (i) PW, (ii) AW and (ili) IRR for the ATCF Step 7: Choose Inflation and calculate ATCF Choose the appropriate value for the Inflation rate from the following table and calculate () PW, (i) ERR and (i IRR based on ATCF Options Inflation Rate 1 4% 2 5% 3 6% m
