Question

Apple wants to buy a new machine that they think will streamline their packaging of ipads and they want to run some numbers on it to see if makes sense to proceed.

EBIT = 200 Tax rate 20%   Machine cost 400    salvage value 50     4 yr machine life

Working capital 5 per yr including startup at time 0    

Bond coupon 4%, beta .9 risk free rate 1% mkt risk premium 8%.   30% debt to cap

3. Calculate IRR, NPV, and payback period. Show your work in excel please.

EDIT: cost of debt = coupon(1-T)           Depreciation = (cost of machine less salvage value) divided by 4 years of machine life

Answer 1

WACC = (weight of debt * cost of debt) + (weight of common stock * cost of common stock)

cost of debt = coupon rate * (1 - tax rate) = 4% * (1 - 20%) = 3.2%

cost of equity = risk free rate + (beta * market risk premium)

cost of equity = 1% + (0.9 * 8%) ==> 8.2%

WACC = (30% * 3.2%) + (70% * 8.2%) = 6.7%

Operating cash flow (OCF) each year = income after tax + depreciation - investment in working capital

In year 4, the entire working capital investment is recovered, and hence the investment in working capital is negative

NPV and IRR are calculated using NPV and IRR functions in Excel

Payback period is the time taken for the cumulative cash flows to equal zero

Payback period = 1 + (cash flow required in year 2 for cumulative cash flows to equal zero / year 2 cash flow) = 1 + ($162.50 / $242.50) = 1.67 years

NPV is $479.86

IRR is 49.82%