Your company is considering spending $1.25 billion to purchase equipment to build state-of-the-art driverless cars. The equipment is depreciated over 5 years, and it costs $250 million to install. Assume equipment is fully installed within the next year.

Your initial price point is $50,000 and your projected sales volume is 85,000 units. Fixed costs are $300,000,000 and each system costs $40,000 in parts and labor. Subsequent year's projections are shown on the next page.

Your marginal tax rate is 35%. Assume that this is one of many projects for the company. No special tax treatments are required for years of negative earnings.

An initial working capital investment of $500,000,000 is required.

You can sell all of your equipment for $5,000,000 (salvage value) at the end of year 5. Also, all working capital investments are recouped at the end of year 5 as well.

You have one bond outstanding, one class of common shares, and one class of preferred stock as shown below. Assume the current capital structure will remain unchanged with this project.

Is this project worth doing? The market premium is 7% and the risk free rate is 2.5%.

What is your decision: DEAL OR NO DEAL?

Different stakeholders may be interested in different numbers, so at a minimum, justify your decision by calculating the payback period, the discounted payback period, the NPV, the IRR, the MIRR

Please use excel

The past data:

Selected Projections (input values)

Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Unit Price

150,000

150,000

136,000

136,000

134,000

150,000

150,000

150,000

Unit Sales

85,000

110,000

115,000

120,000

65,000

150,000

175,000

170,000

Variable

Costs

(120,000)

(121,000)

(124,000)

(128,000)

(132,000)

(136,000)

(140,000)

(144,000)

Fixed Costs

(328,000,000)

(334,000,000)

(341,000,000)

(347,000,000)

(354,000,000)

(361,000,000)

(369,000,000)

(376,000,000)

Securities Data as of November 14, 2018

Debt

Rating

Price

(%

of

Face)

Coupon

Coupons

Paid

Maturity

Current

Yield

Bonds

Outstanding

Market

Value

Bond 1

BBB

91.29

7.00%

annual

5/6/30 (10 Yrs)

7.879

2,500,000

2,282,250,000

Common Stock

Market

Value

Par

Value

Last

Dividend

Growth

Rate

Beta

Shares

Outstanding

Market

Value

Class A Shares

$28.35

$1.00

0.75

5.00%

1.1

273,500,000

7,753,725,000

Preferred Stock

Market

Value

Par

Value

Dividend

Shares

Outstanding

Market

Value

Shares

$115.00

$100

$8.75

15,000,000

1,725,000,000