weighted average cost of capital
1.1. Marshall Industries Limited is a large publicly listed company and is the market leader in vacuum cleaner manufacturing in New Zealand. The company is undertaking a six-year project to set up a manufacturing plant overseas to produce a new line of commercial vacuum cleaners. The company bought a piece of land four years ago for S 3 million in anticipation of using it for its proposed manufacturing plant. If the company sold the land today, it would receive 5 0.}'5 million after taxes. In six years, the land can be sold for 514 million after taxes and reclamation costs. The manufacturing plant will cost SETS million to build. The following market data on Marshall Industries Ltd are current: Debt $120,000,000,?.259 coupon bonds outstanding with 20 years to maturity redeemable at par, selling for 05 per cent of par; the bonds have a $1000 par value each and make semi-annual coupon payments. E- ui 15,000,000ordina shares, sellin_ for $55 -er share Non-redeemable 12,000,000 shares [par value 5 10 per share) with 6.5% dividends [after taxes), selling Preference shares for $32 - er share The following information is relevant: I Marshall Industries Limited's tax rate is 23% I The company had been paying dividends on its ordinary shares consistently. Dividends paid during the past six years is as follows \"m-\"m I The project requires 5 3.25 million in initial net working capital investment in year zero. Required: 1. Calculate the project's initial (time 0) cash flows. (2 marks) 2. Compute the weighted average cost of capital (WACC) of Marshall Industries Ltd. Show all workings and state any assumptions underlying your computations. (13 marks) 3. Using the WACC computed in part (2) above and assuming the following, compute the project's Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period and the Profitability Index (PI). a. The manufacturing plant has a ten-year tax life, and Marshall Industries Ltd uses Diminishing value method of depreciation for the plant using a 25% depreciation rate per annum. At the end of the project, (i.e., at the end of year 6), the plant can be scrapped for $ 22 million. b. The project will incur $250 million per annum in fixed costs c. Marshall Industries Ltd will manufacture 300,000 commercial vacuum cleaners per year in each of the years and sell them at $ 2,200 per vacuum cleaner. d. The variable production costs are $ 950 per vacuum cleaner. e. At the end of year 6, the company will sell the land. Note: Work all solutions to the nearest two decimals. (16 marks)
