VOLTRAX VENTURES STARTED IN 1970s for the purpose of manufacturing and forging high quality BRASS products with a specialized niche in the production of custom forgings for the agricultural, THEY HAVE AN advantage of in-house forging and heat-treating departments, which allowed themdevelop a variety of innovative forged products.

Investment Proposal

The proposal involves investment in a group of machines that would greatly increase the firm's ability to manufacture

large quantities of steel swords. The purchase price of this machinery would be $3,275,000 and installation costs would total $425,000. The steel sword equipment would have a useful economic life of 5 years, but for tax purposes,depreciation charges would be according to the 7-year MACRS class that applies for most industrial equipment (the amount to be depreciated is the full sum of the machinery and installation costs). It is anticipated that the variable

operating costs, excluding depreciation, will be approximately 40 percent of sales. In the projects first year, incremental

fixed costs (maintenance, etc.) are projected to be $100,000. In each of the remaining years, this fixed cost component is

projected to increase by 2% over the preceding year. Interest charges associated with the financing of this investment

have been estimated at approximately $200,000 per year, for each year of the projects estimated useful life.

the firms account said that this project would not be happening if not for the special feasibility

study performed by the Consulting Group. The study was commissioned and paid for last year at a total cost of

$300,000. Because the steel sword project would not have been approved without the study, Phil suggests that the costs of

the study should be considered as one of the projects initial expenses.

In addition to the initial outlay for the steel sword machinery, the firm anticipates that it will have to make incremental

working capital investments to parallel the expected changes in sales. Based on financial analysis, it has been agreed that

an appropriate estimate of a proper working capital requirement figure would be 8 percent of incremental sales (i.e., the

NWC investment (or recovery) at time t will be 8% of the in sales between time t, and t + 1). Management expects the

machinery to be sold for a before-tax scrap value of $600,000 at the end of year 5. The revenue flows anticipated for this

investment are shown in Exhibit 1 below.

The CFO requests your assistance in preparing an analysis of the decision of whether

or not to purchase the machine. In performing the analysis, the finance officer would like to see estimates of net cash flow

projections for the project, along with the NPV, IRR, and your recommendation. As part of the analysis, he

informed you that he believes that the risk of this project is of similar risk as the average risk for the firm and therefore

you may use the firms Weighted Average Cost of Capital (WACC) as the appropriate discount rate. He has also

informed you that the tax rate to use for the WACC and the capital budgeting analysis is 35%.

The company has 32,000,000 shares of common stock outstanding that are trading for $17.50 per share. The companys beta is

1.5. Financial analysts estimate that the market risk premium over 10-year Treasury Bonds is 6 percent and 10-year

Treasury Bonds currently yield 2.5%. the companies s outstanding bonds have a 6.5% coupon rate, a $1,000 face value, pay

semi-annual coupons, and mature in 9 years. There are 100,000 of these bonds outstanding and they are currently selling

in the open market for 103% of par value.

The details of your relevant cash flow projections (Operating Cash Flow, Capital Spending, Net Working Capital, and

Total Cash Flow) should be clearly presented along with the NPV and IRR in the cover sheet of answers, along with your

final recommendation.

A. What is the WACC for the company? In your answer, please provide your estimates for the cost of debt, the cost of

equity and the WACC.

B. What are the relevant net cash flows, NPV, and IRR for the investment decision? Would you purchase the

machine? If you did not come up with a discount rate in part A above, proceed with your work using a discount

rate of 12% (not the answer to A!).)

Exhibit 1

Sales Projections for Steel Swords

Year Sales Projection

1 $1,500,000

2 $1,800,000

3 $2,500,000

4 $2,300,000

5 $2,000,000

Use the offcial IRS depreciation schedule in Exhibit 2 for your analysis.

Exhibit 2

7-year MACRS Schedule

Year Depreciation

1 14.29%

2 24.49%

3 17.49%

4 12.49%

5 8.93%

6 8.92%

7 8.93%

8 4.46%

VOLTRAX VENTURES STARTED IN 1970s for the purpose of manufacturing and forging high quality BRASS products with a specialized niche in the production of custom forgings for the agricultural, THEY HAVE AN advantage of in-house forging and heat-treating departments, which allowed themdevelop a variety of innovative forged products. Investment Proposal The proposal involves investment in a group of machines that would greatly increase the firm's ability to manufacture large quantities of steel swords. The purchase price of this machinery would be $3,275,000 and installation costs would total $425,000. The steel sword equipment would have a useful economic life of 5 years, but for tax purposes,depreciation charges would be according to the 7-year MACRS class that applies for most industrial equipment (the amount to be depreciated is the full sum of the machinery and installation costs). It is anticipated that the variable operating costs, excluding depreciation, will be approximately 40 percent of sales. In the project's first year, incremental fixed costs (maintenance, etc.) are projected to be $100,000. In each of the remaining years, this fixed cost component is projected to increase by 2% over the preceding year. Interest charges associated with the financing of this investment have been estimated at approximately $200,000 per year, for each year of the project's estimated useful life. the firm's account said that this project would not be happening if not for the special feasibility study performed by the Consulting Group. The study was commissioned and paid for last year at a total cost of $300,000. Because the steel sword project would not have been approved without the study, Phil suggests that the costs of the study should be considered as one of the project's initial expenses. In addition to the initial outlay for the steel sword machinery, the firm anticipates that it will have to make incremental working capital investments to parallel the expected changes in sales. Based on financial analysis, it has been agreed that an appropriate estimate of a proper working capital requirement figure would be 8 percent of incremental sales (i.e., the NWC investment (or recovery) at time t will be 8% of the in sales between time t, and t + 1). Management expects the machinery to be sold for a before-tax scrap value of $600,000 at the end of year 5. The revenue flows anticipated for this investment are shown in Exhibit 1 below. The CFO requests your assistance in preparing an analysis of the decision of whether or not to purchase the machine. In performing the analysis, the finance officer would like to see estimates of net cash flow projections for the project, along with the NPV, IRR, and your recommendation. As part of the analysis, he informed you that he believes that the risk of this project is of similar risk as the average risk for the firm and therefore you may use the firm's Weighted Average Cost of Capital (WACC) as the appropriate discount rate. He has also informed you that the tax rate to use for the WACC and the capital budgeting analysis is 35%. The company has 32,000,000 shares of common stock outstanding that are trading for $17.50 per share. The company's beta is 1.5. Financial analysts estimate that the market risk premium over 10-year Treasury Bonds is 6 percent and 10-year Treasury Bonds currently yield 2.5%. the companies s outstanding bonds have a 6.5% coupon rate, a $1,000 face value, pay semi-annual coupons, and mature in 9 years. There are 100,000 of these bonds outstanding and they are currently selling in the open market for 103% of par value. The details of your relevant cash flow projections (Operating Cash Flow, Capital Spending, Net Working Capital, and Total Cash Flow) should be clearly presented along with the NPV and IRR in the cover sheet of answers, along with your final recommendation. A. What is the WACC for the company? In your answer, please provide your estimates for the cost of debt, the cost of equity and the WACC. B. What are the relevant net cash flows, NPV, and IRR for the investment decision? Would you purchase the machine? If you did not come up with a discount rate in part A above, proceed with your work using a discount rate of 12% (not the answer to A!).) Exhibit 1 Sales Projections for Steel Swords Year Sales Projection 1 $1,500,000 2 $1,800,000 3 $2,500,000 4 $2,300,000 5 $2,000,000 Use the offcial IRS depreciation schedule in Exhibit 2 for your analysis. Exhibit 2 7-year MACRS Schedule Year Depreciation 1 14.29% 2 24.49% 3 17.49% 4 12.49% 5 8.93% 6 8.92% 7 8.93% 8 4.46%