The Bob Co. Balance Sheet for the year ending December 31, 2016 is given below:

BALANCE SHEET ($000)

DECEMBER 31, 2016

ASSETS LIABILITIES

Cash 4,000 Current Liabilities 40,000

Receivables 20,000 Long term Debt^a 125,000

Inventories 16,000 Common Stock^b 200,000

Plant &

Equipment 325,000

Total Assets 365,000 Total liabilities 365,000

^a The bond pays 8% coupon and has $1,000 par value. Since they are expected to be rolled over for a foreseeable future, for all practical purposes, they are perpetual bonds.

^b $ 100 par value

The market value of common stocks is $50 per share. The market value of bonds is $800 each. The current liabilities are assumed to be free of cost and thus do not participate in determining the long-term cost of capital. The company's marginal corporate tax rate is 40%. The beta for this firm's equity is 1.25. The rate of return on market portfolio and the risk-free rate of return are 17% and 5% respectively.

Bob Co. is now considering the purchase of a machine that will cost $180,000. An additional $36,000 is required to put the equipment in position, in condition, and ready to use. This cost is added to the equipment cost for the purpose of computing CCA. The equipment will be the only asset in class 43 (30% CCA rate) and is expected to be sold at the end of year 3 for $80,000. The project initially requires an increase in net working capital (spare parts inventory) of $8,000, which will be recovered at the end of the project (end of the year 3). The equipment would have no effect on revenues, but it is expected to save ABC $100,000 per year (before-tax) in mainly labor related operating costs.

1. Determine the NPV for this project, and state whether the firm should accept or reject the project. ( use Excel chart)

2. Determine the Weighted Average Cost of Capital for the firm

Weighted Avg Cost of Capital ( WACC)

= (0.50 x 0.048) + (0.50 x 0.20)

.0240 + 0.10

= .124 or 12.4%

Project changes to Income	year 0	Year 1	Year 2	Year 3
Operating costs ( labor related)		100000	100000	100000
(less) Deprecition		-32400
Change in EBIT		67600
Taxes 40% corp tax rate		27040
Change in Net Income		40560
Changes to Investments
Change in Operationg Cash flow ( net income plus CCA)		72960
Net Working Capital	-8000	0	0	8000
Equipment ( sold in yr 3)	-216,000	0	0	80000
Total Cash Flow	-224,000	72960