WinterWorld Productions is assessing capital investment. Their current capital structure consists of $1,000,000 in bonds with 15 years to maturity that have a coupon rate of 5.6% paid semi-annually. The bond sold for $1010, had flotation costs of $20, Par $1000. Their tax rate is 40%. Their equity structure consists of 50,000 shares of stock at $60 per share. Beta is .95, the market return is 11%, the risk-free rate is 3%.

1st, what is their WACC?

The investment will entail a new machine costing $260,000 with $10,000 of NWC needed to start. If they do not go forward with this project they can rent out space for $50,000. The machine can be sold at the end of the 5-year project for $60,000. MACRS 5 years will be used. The expected annual unit sales are 3,000/5,000/6,000/4,000/2,000. The selling price is $50 with an increase of 5% per year after year 1. Operating costs are $32 with an increase of 5% per year after year 1. The financial analyst for this project is new and risk-averse and will use 9% for the WACC rather than their actual cost of capital.

What is year 1 OCF?

What is year 5 total cash flow?

Using NPV and IRR analysis, should they proceed with the project?

If they proceed with the project they will borrow $270,000 as a loan with a 6% stated rate. What will their new WACC be?

Final continuation with WinterWorld. If they re-analyze the machine acquisition and use the correct WACC from the previous question the NPV will be higher than the NPV calculated previously at the 9% WACC.

True

False