Teamwork, a manufacturer, is considering a project to launch a new product T1. The project isexpected to have a four-year life.

A new $3,400,000 machine will be required; the machines end-of-project salvage value is about$200,000. Working capital of $750,000 will also be required at the beginning of the project.The project will need twenty production workers and all of them will come from an existing production line of the company. Although the existing production line will have twenty fewer workers, Teamwork believes its production volume will be unaffected because the remainingworkers are prepared to work overtime. The total overtime payment to the remaining workers isexpected to be $240,000 per month in the next 4 years.

T1s expected sales are 300,000 units per year. Variable cost of $15 will be incurred per unit, which can be sold for $32. The twenty production workers will each be paid a fixed monthly sumof $15,000, same as what they will receive if the T1 project is rejected and they stay in the existingproduction line. The project will also require other fixed costs of $250,000 per year.

Teamwork believes the risk of the T1 project is similar to that of the companys existing operations.Teamwork has only two long-term funding sources, equity and bonds. The current market valueof the companys ordinary shares is $50m and the cost of equity is 14% pa.

The company has in issue 500,000 bonds which will mature in six years time. Each bond has a$100 face value and an $86 market value. The coupon rate is 8% pa paid annually. Bond interestpayments have just been made by the company.

The company pays profit tax in the same year at 30% pa. Ignore tax allowable depreciation.

Required:

(a) Determine Teamworks weighted average cost of capital.

(b) Calculate the net present value of the T1 project.

(c) Teamwork has conducted a scenario analysis with three economic scenarios normal (80% probability), weak (15%) and good (5%). T1s expected sales per year are 300,000 units in the normal scenario (same as that given above), 250,000 units in the weak scenario and 330,000 units in the good scenario. Working capital is expected to remain unchanged at $750,000 in all three scenarios.Determine the expected net present value of the T1 project.

(d) T1s production requires significant water usage and the expected cost is already included in the variable cost of $15 per unit. But Teamwork is increasingly concerned that the T1 project may experience water shortage during the dry summer months if rainfall is unexpectedly low in the area where T1s operations are located. Basing on the results in parts b) and c) and the other information provided, advise Teamwork whether the T1 project should be launched.