Question
In: Finance
A proposed arena investment project for KAC-Polo has an equipment cost of $1,100,000. The cost will...
A proposed arena investment project for KAC-Polo has an equipment cost of $1,100,000. The cost will be depreciated straight-line to a zero salvage value over its 20 year life. The firm will also use their existing, but currently unused, equipment for this project that has been fully depreciated but still has a market value of $437,000. Cash sales will be $1,923,490 per year and variable costs will run $270,469 per year. Fixed cost is $46,100 per year. The firm will also need to invest $260,831 in net working capital. Marketing research for this project was $70,500 last year and on-going marketing ads will cost $9,000 per year. The current capital structure is 40 percent common stock and sixty percent debt, however the capital structure next year will change to 60 percent common stock, 10 percent preferred stock, and 30 percent debt. Preferred stock will be issued at $42 a share with annual dividends of $5. Currently, the coupon rate on the bonds is 6% while the yield to maturity is 7%. The US T-bill rate is 2.7%, the beta for KAC-Polo is 1.7, and the current return to the S&P500 is 15%. The corporate marginal tax rate is 31% while the average tax rate is 26%.
What are the cash flows for the project?
What is the cost of capital for this project?
(C.) What is the NPV of this project?
(D.) What is the Payback Period?
(E.) What is the Profitability Index?
(F.) What is the IRR?
(G.) Should you accept or reject this project? Assume the payback cutoff is 4 years.
Solutions
jeff jeffy answered 2 years agoRelated Solutions
A proposed investment has a project life of four years. The necessary equipment will cost of...
A proposed investment has a project life of four years. The
necessary equipment will cost of $1,200, and have a useful life of
4 years. The cost will be depreciated straight-line to a zero
salvage value, but will have a market worth $500 at the end of the
project’s life. Cash sales will be $2,190 per year for four years
and cash costs will run $670 per year. Fixed cost is $176 per year.
The firm will also need to...
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Project A: This project requires an initial investment of $20,000,000 in equipment which will cost an...
Project A: This project requires an initial investment of
$20,000,000 in equipment which will cost an additional $3,000,000
to install. The firm will use the attached MACRS depreciation
schedule to expense this equipment. Once the equipment is
installed, the company will need to increase raw goods inventory by
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for $1,500,000. With this investment, the project will last 6 years
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You are considering investing in a project that requires an up-front investment of $1,100,000 and is...
You are considering investing in a project that requires an
up-front investment of $1,100,000 and is expected to produce NOI
for the four year holding period as follows: Year 1: $81,000, Year
2: $96,000, Year 3: $104,000, Year 4: $113,000. Also, at the end of
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A proposed cost saving investment has a five year life and an installed cost of $800,000....
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We are evaluating a project that costs $1,100,000, has a life of
10 years, and has no salvage value. Assume that depreciation is
straight-line to zero over the life of the project. Sales are
projected at 47,000 units per year. Price per unit is $50, variable
cost per unit is $25, and fixed costs are $820,000 per year. The
tax rate is 21 percent and we require a return of 16 percent on
this project. Suppose the projections given for...
We are evaluating a project that costs $1,100,000, has a life of 10 years, and has...
We are evaluating a project that costs $1,100,000, has a life of
10 years, and has no salvage value. Assume that depreciation is
straight-line to zero over the life of the project. Sales are
projected at 47,000 units per year. Price per unit is $50, variable
cost per unit is $25, and fixed costs are $820,000 per year. The
tax rate is 21 percent and we require a return of 16 percent on
this project. Suppose the projections given for...
Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment...
Joetz Corporation has gathered the following data on a proposed
investment project (Ignore income taxes.):
Investment required in equipment
$
37,000
Annual cash inflows
$
8,800
Salvage value of equipment
$
0
Life of the investment
15
years
Required rate of return
10
%
The company uses straight-line depreciation on all equipment.
Assume cash flows occur uniformly throughout a year except for the
initial investment.
The simple rate of return for the investment (rounded to the
nearest tenth of a...
Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment...
Joetz Corporation has gathered the following data on a proposed
investment project (Ignore income taxes.):
Investment required in equipment
$
35,500
Annual cash inflows
$
8,200
Salvage value of equipment
$
0
Life of the investment
15
years
Required rate of return
10
%
The company uses straight-line depreciation on all equipment.
Assume cash flows occur uniformly throughout a year except for the
initial investment.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine
the appropriate discount factor(s)...
Joetz Corporation has gathered the following data on a proposed investment project (Ignore income taxes.): Investment...
Joetz Corporation has gathered the following data on a proposed
investment project (Ignore income taxes.):
Investment required in equipment
$
31,000
Annual cash inflows
$
6,400
Salvage value of equipment
$
0
Life of the investment
15
years
Required rate of return
10
%
The company uses straight-line depreciation on all equipment.
Assume cash flows occur uniformly throughout a year except for the
initial investment.
Click here to view Exhibit 13B-1 and Exhibit 13B-2, to determine
the appropriate discount factor(s)...
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