Question

1. Upload an Excel spreadsheet or use the indirect method showing the cash flows of the investment for the € 400.000 investment. Discuss your findings in about 100 words. ( note : you have to assume the numbers and how you want to invest )
2. Estimate/calculate the overall rate of return (WACC) for the € 400.000 investment based on your personal assumptions. How are you going to finance this investment? Discuss about the capital structure mix you have chosen and how this mix affects the WACC.

Answer 1

Q. Rogers, Inc. is considering the acquisition of new machinery. A consulting company in Mr. Rogers’ neighborhood provided the following information about the economic effects of this acquisition: The cost of the machinery is estimated to be €380 plus installation costs of €20. The new machinery would require fewer workers and less electricity. The projected before-tax costs savings are €90 in the first year, increasing at a 3% rate over the ten-year economic life of the machinery. The new machinery will depreciate using the Straight Line method over ten years to a zero salvage. Rogers, Inc., is subject to an income tax rate of 30%. Equity Investor expected rate of return is 15%, or the company can issue 8% Debenture.

The company has full independence and can choose any mix of Capital Structure mentioned Below.

1. 100% Equity

2. 50% Equity and 50% Debenture

3. 100% Debenture

Conclusion:

Best Cost Structure is 5, 100% debenture since its WACC is lowest, which leads to maximum NPV.

Feel free to ask any Query in Comment Section

Please provide feedback.

Cheers