You plan to open a bar and run it for five years (year 1 through 5)....

You plan to open a bar and run it for five years (year 1 through 5).
- The equipment will cost $2 million in year 0 and will be straight-line depreciated to $0 over 10 years, but you expect to sell it for $1.2 million at the end of year 5. The average and marginal tax rate is 10%.
- In year 1 through 5, you expect annual revenues to be $2 million, annual fixed costs to be $100,000, and annual variable costs to be $1.4 million.
- Working capital is expected to equal 10% of next year's annual revenues (Note: revenues in year 6 will be $0).
- You will finance this project using 60% common stock, 10% preferred equity and 30% debt. The market risk premium is 8.0%, the risk-free rate is 4.0% and your common stock beta 1.5. The preferred shares are trading at $20.00 and offer a constant annual dividend of $1.8 forever. The interest rate on your debt is 5%.

A) What are the total annual free cash flows associated with this project in year 0, years 1 through 4, and year 5?
B) What is the appropriate discount rate (WACC) for this project?
C) What is the NPV of this project? Should you accept this project?

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Expert Solution

jeff jeffy answered 2 years ago

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