Evergreen company is investigating the feasibility of buying a new production line producing a new product. They project unit sales as in the below table, and they project price per unit to be $120 per unit at the beginning. And when competition catches up after 3 years (in the 4th year), they anticipate that the price would drop to $110. This project requires $20,000 in net working capital at the beginning. Subsequently, total net working capital at the end of each year would be about 15% of total sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year. It costs about $900,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment and falls in Class 8 with a CCA rate of 20%. The equipment will actually be worth about $150,000 in eight years. The relevant tax rate is 40%, and the required return is 15%. Years Unit Sales 1 3000 2 5000 3 6000 4 6,500 5 6000 6 5000 7 4000 8 3000 Based on the above information and assuming that the asset class is CLOSED calculate the NPV. 2. Calculate the IRR (assuming the asset class is CLOSED) 3.Based on your above answers, should the company proceed with the project? Explain Yes No Indifferent 4.Assume that the asset class will remain OPEN, calculate the NPV 5.Calculate the IRR (assuming that the asset class remain OPEN) 6.Based on your previous answers, should Evergreen go ahead with the project (assuming the asset class will remain open)? Explain. Yes No Indifferent 7.On the other hand, Evergreen company is also considering replacing one of its old production lines with a new one with an advanced technology. It has undergone a market research last year that costed $120K which showed that there is an increase in demand for such a new technology .The new production line will cost $3M and is expected to have a salvage value in 6 years for $750K. The existing production line was bought 2 years ago for $1.2M, and can be sold today at a market value of $500K. If not sold now, this old machinery is expected to have a salvage value of $100K in 6 years. The project is expected to generate sales in year 1 for $4.2M and thereafter sales are forecasted to grow by 6% a year for the coming 6 years. This is as opposed to the current production line which was expected to generate $3.5M of sales next year and grows by 2% for the coming 6 years. Manufacturing costs are the same under both production lines. The new project requires an initial investment in working capital of $400k. Thereafter, working capital is forecasted to grow at the same growth rate of revenues of 6% (CCA rate is 20%, the asset class will remain open, tax rate is 40% & discount rate is 15%). Calculate the NPV 8.Calculate the IRR of the replacement project 9.Should Evergreen company go ahead with the replacement project? Yes No Indifferent 10.If the financial Manager of Evergreen wants to decrease its cost of capital by adding more debt to its capital structure and arrive at a debt-equity ratio of 0.60. If its debt is in the form of a 6% semiannual bond issue outstanding with 15 years to maturity. The bond currently sells for 95% of its face value of $1000. On the other hand, suppose the risk-free rate is 3% and the market portfolio has an expected return of 9% and the company has a beta of 2. If the tax rate is 40%, calculate: The company's after-tax cost of debt 11.Calculate the company's cost of equity 12.What would be the company's overall cost of capital (WACC) at the targeted capital structure of debt equity ratio of 0.60? 13.If the company achieves this new cost of capital, would your investment decision change regarding the previous two investment opportunities? Explain your answer.
Evergreen company is investigating the feasibility of buying a new production line producing a new product. They project unit sales as in the below table, and they project price per unit to be $120 per unit at the beginning. And when competition catches up after 3 years (in the 4th year), they anticipate that the price would drop to $110.
This project requires $20,000 in net working capital at the beginning. Subsequently, total net working capital at the end of each year would be about 15% of total sales for that year. The variable cost per unit is $60, and total fixed costs are $25,000 per year.
It costs about $900,000 to buy the equipment necessary to begin production. This investment is primarily in industrial equipment and falls in Class 8 with a CCA rate of 20%. The equipment will actually be worth about $150,000 in eight years. The relevant tax rate is 40%, and the required return is 15%.
Years Unit Sales
1 3000
2 5000
3 6000
4 6,500
5 6000
6 5000
7 4000
8 3000
Based on the above information and assuming that the asset class is CLOSED calculate the
2.
Calculate the
3.Based on your above answers, should the company proceed with the project? Explain
Yes
No
Indifferent
4.Assume that the asset class will remain OPEN, calculate the NPV
5.Calculate the IRR (assuming that the asset class remain OPEN)
6.Based on your previous answers, should Evergreen go ahead with the project (assuming the asset class will remain open)? Explain.
Yes
No
Indifferent
7.On the other hand, Evergreen company is also considering replacing one of its old production lines with a new one with an advanced technology. It has undergone a
Calculate the NPV
8.Calculate the IRR of the replacement project
9.Should Evergreen company go ahead with the replacement project?
Yes
No
Indifferent
10.If the
On the other hand, suppose the risk-free rate is 3% and the market portfolio has an expected return of 9% and the company has a beta of 2. If the tax rate is 40%, calculate:
The company's after-tax cost of debt
11.Calculate the company's
12.What would be the company's overall cost of capital (WACC) at the targeted capital structure of debt equity ratio of 0.60?
13.If the company achieves this new cost of capital, would your investment decision change regarding the previous two investment opportunities? Explain your answer.
Trending now
This is a popular solution!
Step by step
Solved in 4 steps with 6 images
