Problem 3 6. Use Table 2 to calculate New Horizons' WACC. Should New Horizons go ahead to buy the new machine? Why? ? New Horizons Co.'s products are in high demand these days; as such, the firm wants to purchase a new machine to boost its productivity. After spending $45,000 on marketing research, New Horizons CFO believes that buying the new machine will increase the firm's sales by 1 million dollars per year, and cost of goods sold by $0.2 million per year. Because of the new machine, New Horizons' net working capital is expected to be $100,000 higher throughout the life of the new machine. New Horizons currently has enough workers to operate the new machine; however, some of the less skilled workers need further training which will cost the firm approximately $50.000. Of course, the training can only start when the new machine is in place. The new machine has a price of 2 million dollars and falls into a MACRS ADS 3-year class; thus, it should be depreciated at 33.33%, 44.45%, 14.81% and 7.41% in years 1 through 4, respectively. The machine has an expected life of 4 years; after that, the manufacturer of the machine offers to recycle it for free. The new machine will occupy a small room which is currently used as a storage room; as a result, New Horizons will need to rent a new storage room for $20,000 a year after-tax). New Horizons currently faces a 35% tax rate. The firm has common shares and bonds only, and the firm's capital structure is described in Table 2 below. Table 2. New Horizons' Debt and Equity Equity: 2 Number of shares outstanding 10,000,000 Stock price $5.50 Cost of equity 12% c If the CFO wants a minimum return of 15%, should the new machine be purchased? Debt: e Number of bonds issued Par value Years left until maturity Coupon rate Current bond price 50,000 $1,000 20 7% per year, semi-annual coupons $900 a. Please complete the table below to calculate financial cash flows. Hint: In this case, AEBIT = ASales - ACost of Goods Sold - Depreciation Year 02 Year le Year 2 Year 3e Year 42 le e Minus: Taxes Depreciation ] e le Minus: ANWCA e JE Capital Investment e Other Financial Cash Flow