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WP Corp plans to take up a project that will cost $150,000 of investment in Buil
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.
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