Question:Your company is considering a new project, and you have the
following information:
Two years ago,...
Question
Your company is considering a new project, and you have the
following information:
Two years ago,...
Your company is considering a new project, and you have the
following information:
Two years ago, the company paid $1,000,000 for the land and
building that will house the project. The property could be sold
for $3,000,000 today. Its book value is the purchase price.
One year ago, the firm spent $100,000 on initial marketing for
the project.
The project requires the purchase of a machine (in year 0) for
$500,000. The machine will be fully depreciated straight-line in
years 1-5.
The project will generate sales of $800,000 per year and
expenses of $550,000 per year for years 1-5.
The firm will pay $15,000 in interest on debt that will be used
to fund the project.
In year 1, the firm must increase its inventory by $25,000. It
will maintain the new level of inventory through year 5.
The marginal tax rate is 35%.
In your NPV calculation, what cash flow should you use for year
0?
In your NPV calculation, what cash flow should you use for year
1?
Finding WACC: A firm has $10 billion in debt,
$40 billion in equity, and a tax rate of 35%. The pre-tax cost of
debt and equity are 6% and 10%, respectively. What discount rate
should it use for a typical project?