WP Corp plans to take up a project that will cost $150,000 of investment in Building and $80,000 in new machinery. WP has already spent $8000 on research and analysis about the products that will be developed in this unit.

By taking up this project, WP estimates additional cash flows of $85000 per annum for the next five years.

COGS are expected to be 40% of the revenues, SG&A will be 4% of the revenues.

This project will require an additional inventory of $60,000 and an increase in payables by $25000

Tax Rate is 20%

The target Debt: Equity is 1:4

Cost of new debt: 6%

Cost of Equity: Need to calculate using the beta of 0.9, Rf of 4%, and market risk premium of 6%

The equipment that would be used has a 3-year tax life. Under the new tax law, the equipment used in the project is eligible for 100% bonus depreciation, so it will be fully depreciated at t = 0.

The Salvage value of Building and Machinery after 5 years is $100,000.

You, as a financial manager, need to help the CFO figure out if this project should be undertaken or not.

(The answer sheet will require you to calculate the initial outflow, EBIT, Net Income and Cash Inflows (FCF) over the years, Terminal Value, Cost of Equity, WACC, NPV, IRR, MIRR, and finally answer if the project should be undertaken or not)

1. What is the initial outlay?(Show the working as to what items are included)

2. Calculate Cost of Equity using CAPM:

3. Calculate WACC

4.

Fill in the below income statement
	2022	2023	2024	2025	2026
Revenue
COGS
Gross Profit
SG&A/Other costs
Depreciation
EBIT
Interest
EBT
Tax
Net Profit

5. Calculate Operating Cash Flow for the 5 years

	2022	2023	2024	2025	2026
EBIT (1-Tax)
Add: Depreciation
FCF

6. What is the Terminal Value (Show the working)

7. Calculate NPV

8. Calculate IRR (You can use calculator or the excel formula)

9. Calculate MIRR (You can use calculator or the excel formula)

10. What is conclusion- should the project be undertaken or not? Why?