The management of a large manufacturing company is planning to invest in a new machine which they believe will improve the production process. Market research undertaken by their consultants revealed that the company should in fact invest in a new computerized machine.

The new machine is expected to have a purchase price of $775,000 and will incur shipping and installation of $125,000 and $87,500 respectively. The machine is expected to last four years and can be sold for $137,500 scrap. Prior to installation, it is required to be tested for compliance of environmental laws. Management expects to incur $62,500 for the cost of commissioning the machine. The consultants fees were $500,000.

However, the machine is expected to increase efficiency by reducing annually operating cost from $1,100,000 to $600,000 annually. The capitalized cost of the machine is to be financed by 50% debt. The entity usually discounts its project using the weighted average cost of capital. Prior to this project, the entity was all equity financed. The entitys growth rate in stock price is normally 15%. The companys EPS is currently $15 per share and the directors expects to pay dividends of $15 per share. The current price of the stock is $100 per share.

The companys debt is to be borrowed net at 15%. Net borrowing involves the deduction of applicable income taxes; hence, the cost of debt is already stated net. The entity has a marginal tax rate of 30% and projects are discounted at its WACC. All cash inflows are deemed to occur at the end of each period and depreciation is an allowable deduction for income taxes purposes.

Required:

a) Compute Weycos WACC (weighted average cost of capital). (3 marks)

b) Compute Weycos Net Present Value (NPV). (15 marks)

c) Compute payback period. (3 marks)

d) Based on the NPV and payback period, advise management on the feasibility of the project. (2 marks)