Question
In: Finance
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?
Solutions
jeff jeffy answered 2 years agoRelated Solutions
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