Question

Amicable Corporation is considering the issue of a new product to be added to its product mix. They hired you, a recent business graduate from MacEwan, for conducting the analysis. The production line would be set up in an unused space at the company's main plant. The plant space could be leased out to another firm at $25,000 per year. They have to buy new machinery. The approximate cost of the machine would be $200,000, with another $15,000 in shipping and handling charges. It would also cost an additional $25,000 to install the equipment. The machinery has an economic life of 6 years and would be in class 8 with a CCA rate of 30%. The Machinery is expected to have a salvage value of $95,000 after 6 years of use. The new product line would generate incremental sales of 1,200 units per year for 6 years and they are expected to grow 5.5% per year. The cost per unit is estimated in $62 per unit in the first year. Each unit can be sold of $200 in the first year. The sales price and cost per unit are bothe expected to increase by 3.2% per year due to inflation. The fixed costs are estimated to be $100,000 at the end of th1st year and would increase with inflation. To handle the new product line, the firm's net operating working capital would be an amount equal to 15% of sales reventue. The firm tax rate is 37%. There are 1000 common shares outstanding with market price of $40 each. Alsom they have 100 preferred shares with market value of $50. There are $50,000 long-term bond trading in market with an average price of $1,100 and 6 years to maturity, and 8% semi-annual coupon. Common shares of firm have a beta of 1.3 Risk free rate is 4% and expected market return is 16%. Preferred stock holders are recieveing $1 quarterly dividend. The project is considered by the financial department to be as risky as the company. The reinvestment risk is assumed to be 15%. 1) -FInd the NPV & IRR of the project by using the pro forma financial statement method to determine cash flow. -Enter the input variables in cells of their own at the top of the spread sheet (so it is easier to do sensitivity analysis calculations) - Set up the necessary equations by referencing to the input variable cells. The spreadsheet must be formular driven: do not put any numbers in equations, only cell references. - Use Excel's Built in functions wherever possible (eg. NPV and IRR functions) 2) Break Even Analysis - At what WACC rate and Unit sales price the project is going to break even based on NPV method?

Answer 1