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Your corporation is considering investing in a new product line. The annual revenues (sales) for the...

Your corporation is considering investing in a new product line. The annual revenues (sales) for the new product line are expected to be $176,500.00 with variable costs equal to 50% of these sales. In addition annual fixed costs associated with this new product line are expected to be $43,655.00 . The old equipment currently has no market value. The new equipment cost $55,504.00 . The new equipment will be depreciated to zero using straight-line depreciation for the three-year life of the project. At the end of the project the equipment is expected to have a salvage value of $37,073.00 . An increase in net working capital of $62,909.00 is also required for the life of the project. The corporation has a beta of 0.879 , a tax rate of 27.76% , and a target capital structure consisting of 62.04% equity and 37.96% debt. Treasury securities have a yield of 1.93% and the expected return on the market is 11.13% . In addition, the company currently has outstanding bonds that have a yield to maturity of 8.36%.     
     a) What is the total initial cash outflow? (show as negative number)
     b) What are the estimated annual operating cash flows?
     c) What is the terminal cash flow?  
     d) What is the corporations cost of equity?
     e) What is the WACC?
     f) What is the NPV for this project?
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Answer #1

Calculate the Initial cash out flow, annual operating cash flows, Cost of equity, WACC and NPV as follows:

1 Particulars Year 0 Year 1 Year 2 Year 3 2 Sales $176,500.00$176,500.00$176,500.00 $88,250.00$88,250.00$88,250.00 S43,655.00$43,655.00$43,655.00 $18,501.33 $18,501.33$18,501.33 $26,093.67$26,093.67$26,093.67 S7,243.60$7,243.60$7,243.60 $18,850.06$18,850.06$18,850.06 $18,501.33 $18,501.33$18,501.33 3 Less: variable cost Fixed cost Depreciation 4 6 EBIT 7 Less. Tax @ 27.76% 8 EBT 9 Add: Depreciation 10 Initial investment 11 Working capital (WC 12 a Total initial cash out flow -S118,413.00 13 b Annual operating cash flow 14 c Terminal cash floww 15 Recovery of WC 16 Salvage value 17 Terminal cashflows 18 19 d Cost of equity 20 21 e WACC 22 Equi 23 Debt 24WACC 25 26 f Total cash flow 27 PVF 28 Py of cash flows 29 -$55,504.00 -$62,909.00 S37,351.40 $37,351.40$37.351.40 $62,909.00 $26,781.54 $89.690.54 10.02% Rate 10.02% 6.04% 62.04% 37.96% 6.21% 2.29% 8.51% -$118,413.00$37,351.40 $37,351.40 $127,041.93 -$118,413.00 $34,423.05$31,724.29$99,443.11 1 0.9216001450.849346828 0.78275816 Net present value S47,177.46

Formulas:

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