Problem #2: Capital Budgeting, NPV, & WACC (15 points) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $5 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $250,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $2.50 per trap and the traps will be sold for $5 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is unknown but will be similar to the average project for the firm. 0 Year Sales (units) 1 500,000 2 600,000 3 4 1,000,000 1,000,000 5 600,000 0 Use the information below to calculate the firm WACC. Round to two decimal places, for example 20.00%. Equity Mkt Value $50,000,000 Book Value $5,000,000 Shares 1,000,000 Price $50.00 Div $1.50 Beta 2 Mkt Risk Premium 6.2% Risk Free Rate 3% Debt Mkt Value $50,000,000 Book Value $50,000,000 Bonds Outstanding 50,000 Price $100 Coupon (semi-annual) 8% Maturity 10 Tax rate 35% a. Cost of equity? Equity Mkt Value Book Value Shares $50,000,000 $5,000,000 1,000,000 $50.00 Price Div $1.50 Beta 2 Mkt Risk Premium 6.20% 3% Risk Free Rate b. Pre-tax Cost of Debt Debt Mkt Value Book Value Bonds Outstanding Price Coupon (semi-annual) Maturity Tax rate $50,000,000 $50,000,000 50,000 $100.00 8% 10 35% C. WACC d. NPV Given information is below. You will need to build out the remaining capital budgeting analysis. 0 2 1 500,000 3 1,000,000 5 600,000 Units 600,000 1,000,000 Problem #2: Capital Budgeting, NPV, & WACC (15 points) After spending $3 million on research, Better Mousetraps has developed a new trap. The project requires an initial investment in plant and equipment of $5 million. This investment will be depreciated straight-line over five years to a value of zero, but, when the project comes to an end in five years, the equipment can in fact be sold for $250,000. The firm believes that working capital at each date must be maintained at 10% of next year's forecasted sales. Production costs are estimated at $2.50 per trap and the traps will be sold for $5 each. (There are no marketing expenses.) Sales forecasts are given in the following table. The firm pays tax at 35% and the required return on the project is unknown but will be similar to the average project for the firm. 0 Year Sales (units) 1 500,000 2 600,000 3 4 1,000,000 1,000,000 5 600,000 0 Use the information below to calculate the firm WACC. Round to two decimal places, for example 20.00%. Equity Mkt Value $50,000,000 Book Value $5,000,000 Shares 1,000,000 Price $50.00 Div $1.50 Beta 2 Mkt Risk Premium 6.2% Risk Free Rate 3% Debt Mkt Value $50,000,000 Book Value $50,000,000 Bonds Outstanding 50,000 Price $100 Coupon (semi-annual) 8% Maturity 10 Tax rate 35% a. Cost of equity? Equity Mkt Value Book Value Shares $50,000,000 $5,000,000 1,000,000 $50.00 Price Div $1.50 Beta 2 Mkt Risk Premium 6.20% 3% Risk Free Rate b. Pre-tax Cost of Debt Debt Mkt Value Book Value Bonds Outstanding Price Coupon (semi-annual) Maturity Tax rate $50,000,000 $50,000,000 50,000 $100.00 8% 10 35% C. WACC d. NPV Given information is below. You will need to build out the remaining capital budgeting analysis. 0 2 1 500,000 3 1,000,000 5 600,000 Units 600,000 1,000,000
