Suppose that you are the financial manager of Latex Corp. This firm considers to buy a machine in 2021 whose cost is $ 20 000 000. The cost of investment is paid in 2021. The expected lifetime of the machine is 5 years. That machine is subject to 5-year straight line depreciation allowing the firm to write off a $ 4 000 000 depreciation expense in each year from 2022 to 2026. The firm wants to know if that investment is feasible given the following information.

The last available balance sheet of that firm is as follows:

Assets:

Current Assets: $ 40 000 000

Long-Term Assets: $120 000 000

Total Assets: $ 160 000 000

Liability and Equity:

Accrued Expenses $ 5 000 000

Account Payables $ 5 000 000

Short-Term Loan $20 000 000

Long-Term Loan $ 80 000 000

Equity as Common Stock: $ 50 000 000

Total Liab. and Equity $ 160 000 000

The firm do not have any outstanding preferred stocks. The following information is also given:

The firm has one short-term loan and the firm pays an annual interest rate of 14% on this loan. The firm has one long-term loan of $ 80 000 000 and the firm pays an annual interest rate of 12% on that long-term loan. The corporate tax rate is 25%.

The firm expects to pay a dividend $ 1.5 per share to common stock holders next year. The current market value of common stock is $15 per share. Latex Corp. uses dividend discount method to find the cost of equity and expects an annual growth rate of 4% in future dividends.

This investment is expected to increase the sales revenue of the firm as follows

2022 2023 2024 2025 2026

$ 7 000 000 $ 11 000 000 $ 12 000 000 $ 8 000 000 $ 6 000 000

The COGS (Cost of Goods Sold) of that investment is 50% of the sales revenue and the general&administrative costs of that investment is 10% of the sales revenue in each of the years above.

This investment is expected to increase the inventories by $ 500 000 in 2022. It is also estimated that accounts receivables will increase by $ 700 000 in 2022 and account payables will increase by $ 200 000 in 2022 because of that investment. There will be no change in inventories, account receivables and account payables in the years 2023, 2024 and 2025. All the inventories will be sold in 2025 and all account receivables will be received in 2026. The firm also will pay all remaining account payables in 2026.

Finally; the firm estimates that it can sell this machine by the end of 2026 for a value of $ 3 000 000 (salvage value of the machine is $ 3 000 000). The sale of the machine in 2026 do not create any additional tax burden in 2026. Given that information

a) Find the relevant discount rate (WACC) of that firm

b) Estimate the operating cash flow and the net cash flow of that firm for years 2022,2023, 2024, 2025 and 2026 using information above.

c) Calculate the net PV of that investment using the discount rate (WACC) that you will find in 1a above and decide if that investment is feasible or not. Also mention how much the value of the firm may increase by that investment.

Note: Use up to 4 decimals (e.g 0.1721) in your calculations.