Question 1: Please complete the NPV analysis on the attached worksheets and present assumptions, conclusions and financial results.

2. LiteStrongs SVP of Marketing understands the definition and calculation of WACC, but he wonders what WACC represents, and why should he care about itespecially in a private company? Also, why is it used as a discount rate?

3. LiteStrongs Operations manager wonders if LiteStrong borrows all of the money to purchase the new machine should they just use the cost of the debt to discount the machines cash flows? Why or why not? What would be the effect of this action?

4.

Sam Whittemore and John Parkerfaccompanied Will Neverplease, their NU finance professor on a consulting engagement to LiteStrong Bike Company in nearby Lexington. Among other work to perform for the company, Whittemore and Parker were tasked with creating an estimate of the cost of capital for the privately-held firm and using that to evaluate the potential purchase of a manufacturing process machine. LiteStrong manufactured high-end bicycles made from either titanium or carbon fiber. Whereas more simple steel bicycles might be purchased at mass-merchandise or sporting goods or even hardware stores for $150-$250, most bicycles made from lighter materials like aluminum or titanium or carbon fiber were sold through Independent Bike Dealers (IBDs) with retail prices from $500 to $10,000 or more. (See attached memo on collected industry data.) LiteStrong's bicycles ranged in retail price from $1500 to over $10,000, with the average being about $5000 per bicycle. All of LiteStrong's bicycles were either sold through IBDs or, to a lesser extent, direct to the consumer via web sales, where the buyer could order exact measurements and equipment for a "super-retail" price. Notably, the company had begun to address strong demand for its bicycles from Asia, South America, Europe and Russia- however, regardless of the buyer's location, all sales currently were in USD. While reviewing the attached Lite Strong financial data, Prof. Neverplease said that the company had exhibited consistent growth from about $15MM in sales 10 years ago. He also said that over the same 10 years all of the firm's public competitors had either been delisted, ceased to exist, or were purchased by larger conglomerate companies. In fact, today only one of those "larger conglomerate companies" was publicly-traded. That Canadian firm, Lerod Industries, Inc. (LII), owned several of the mid-to-higher priced quality brands that LiteStrong considered as its primary competitors. Other competitors were much smaller, custom bike companies.) Lil had 2016 sales of about $2.6BN and about 36% of its revenues were attributable to the Sports Division housing seven bicycle companies it owns. The balance of its revenues was fairly evenly split between juvenile products like car seats, strollers, etc. and home products like furniture and furnishings. Its overall Beta was .73 and the Canada country Beta slope was 0.97. Its market to book value was 1.88X. Of note, when it valued its Sports Division Goodwill created by acquisitions) for Impairment accounting purposes, LII valued IBD cash flows at a 16.5% discount rate and also assigned a 3% constant growth rate to them. Prof. Neverplease had found data that supported Betas of 0.65 and 0.70, respectively for companies similar to Lil's juvenile and furniture and furnishings two non-bike divisions. In addition to common stock earnings retention, LiteStrong had three other financing sources. The first was a $3MM revolving credit facility with a local bank that it used sparingly. It was priced at Prime +1%, which meant that the current all-in rate was 4.5%. Second, LiteStrong had recently completed a $15MM 10-year private-placement of bonds with a Boston insurance company. Although the bonds were sold as floating rate, LiteStrong opted to purchase an interest-rate swap, resulting in an all-in fixed cost of 6.10% per year. The bonds also had a registration feature attached in case the insurance company needed to try to sell the bonds publicly. Sam Whittemore and John Parkerfaccompanied Will Neverplease, their NU finance professor on a consulting engagement to LiteStrong Bike Company in nearby Lexington. Among other work to perform for the company, Whittemore and Parker were tasked with creating an estimate of the cost of capital for the privately-held firm and using that to evaluate the potential purchase of a manufacturing process machine. LiteStrong manufactured high-end bicycles made from either titanium or carbon fiber. Whereas more simple steel bicycles might be purchased at mass-merchandise or sporting goods or even hardware stores for $150-$250, most bicycles made from lighter materials like aluminum or titanium or carbon fiber were sold through Independent Bike Dealers (IBDs) with retail prices from $500 to $10,000 or more. (See attached memo on collected industry data.) LiteStrong's bicycles ranged in retail price from $1500 to over $10,000, with the average being about $5000 per bicycle. All of LiteStrong's bicycles were either sold through IBDs or, to a lesser extent, direct to the consumer via web sales, where the buyer could order exact measurements and equipment for a "super-retail" price. Notably, the company had begun to address strong demand for its bicycles from Asia, South America, Europe and Russia- however, regardless of the buyer's location, all sales currently were in USD. While reviewing the attached Lite Strong financial data, Prof. Neverplease said that the company had exhibited consistent growth from about $15MM in sales 10 years ago. He also said that over the same 10 years all of the firm's public competitors had either been delisted, ceased to exist, or were purchased by larger conglomerate companies. In fact, today only one of those "larger conglomerate companies" was publicly-traded. That Canadian firm, Lerod Industries, Inc. (LII), owned several of the mid-to-higher priced quality brands that LiteStrong considered as its primary competitors. Other competitors were much smaller, custom bike companies.) Lil had 2016 sales of about $2.6BN and about 36% of its revenues were attributable to the Sports Division housing seven bicycle companies it owns. The balance of its revenues was fairly evenly split between juvenile products like car seats, strollers, etc. and home products like furniture and furnishings. Its overall Beta was .73 and the Canada country Beta slope was 0.97. Its market to book value was 1.88X. Of note, when it valued its Sports Division Goodwill created by acquisitions) for Impairment accounting purposes, LII valued IBD cash flows at a 16.5% discount rate and also assigned a 3% constant growth rate to them. Prof. Neverplease had found data that supported Betas of 0.65 and 0.70, respectively for companies similar to Lil's juvenile and furniture and furnishings two non-bike divisions. In addition to common stock earnings retention, LiteStrong had three other financing sources. The first was a $3MM revolving credit facility with a local bank that it used sparingly. It was priced at Prime +1%, which meant that the current all-in rate was 4.5%. Second, LiteStrong had recently completed a $15MM 10-year private-placement of bonds with a Boston insurance company. Although the bonds were sold as floating rate, LiteStrong opted to purchase an interest-rate swap, resulting in an all-in fixed cost of 6.10% per year. The bonds also had a registration feature attached in case the insurance company needed to try to sell the bonds publicly