Question
You are evaluating a 5-year project that costs $1,000,000, has no salvage value, and a net working capital requirement of $100,000. Assume that depreciation is
You are evaluating a 5-year project that costs $1,000,000, has no salvage value, and a net working capital requirement of $100,000. Assume that depreciation is straight-line to zero over the life of the project. Sales are projected at 80,000 units per year. Price per unit is $40, variable cost per unit is $30, and fixed costs are $300,000 per year. The tax rate is 20%. This project has the same level of risk as your current operations. Your company has 300,000 shares of equity outstanding, currently selling for $6 per share. It currently has 1,000 bonds outstanding worth $950 each, with a yield to maturity of 12%. The risk free rate is currently 4%, and the market risk premium is 8%. Your companys beta coefficient on its stock is estimated at 1.2.
a. Calculate the operating cash flow in a typical year of the project.
b. Calculate your companys weighted average cost of capital.
c. What is the net present value of the project? Write down the formula you would use to determine the internal rate of return. Should you recommend the project?
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