You have been asked to analyze whether Proxima Inc, a computer manufacturer, should invest in producing...

You have been asked to analyze whether Proxima Inc, a computer manufacturer, should invest in producing new software.

• Proxima will have to invest $ 5 million if it wants to commercially develop the software, and this investment will be depreciated straight line over four years to a salvage value of zero at the end of the 4th year.

• Based upon a market study, Proxima concludes that it can generate revenues of $6 million every year for the next 4 years; operating expenses (other than depreciation) are expected to be 60% of revenues each year.

• Proxima has an unlevered beta of 0.90 but the unlevered beta for computer software companies is 1.50. The market value of equity for Proxima is $ 80 million and the market value of debt is $ 20 million. Proxima plans to maintain this debt to capital ratio for this project. The cost of debt for Proxima is 7%.

• The riskless rate is 5% and the market risk premium is 4%. The tax rate is 21%.

What is the net present value of this project? Should Proxima Inc. invest in producing new software?

Expert Solution

	we have to first compute Weighted average cost of capital

	Compute of required rate of equity based on CAPM
	Required rate = risk free rate + Market premium * beta
			=(5%+4%*1.5)
			11.00%

	Post tax cost of debt =				=7%*(1-21%)
					5.530%

	Computation of WACC =				=(20/100)5.530%+(80/100)11%
	Computation of WACC =				9.906%

	Computatio of annual operating cash flow

i	Revenue		6,000,000
ii	Cost @ 60%		3,600,000
iii	Annual depreciation	=500000/4	1,250,000
iv=i-ii-iii	Profit before tax		1,150,000
v=iv*21%	Tax @ 21%		241,500
vi=iv-v	Profit after tax		908,500
vii=vi+iii	Annual cash flow		2,158,500





	Computation of present value


	year	Initial investment	Annual cash flow	Total cash flow	PVIF @ 9.906%	present value
	0	-5000000	-	(5,000,000)	1.0000	(5,000,000)
	1		2,158,500	2,158,500	0.9099	1,963,951
	2		2,158,500	2,158,500	0.8279	1,786,937
	3		2,158,500	2,158,500	0.7532	1,625,878
	4		2,158,500	2,158,500	0.6854	1,479,335
						1,856,100

	Therefore present value=					1,856,100
	Since NPV is positive therefore project should be accepted

jeff jeffy answered 1 year ago

You have been asked by a men's clothing manufacturer, Nuke, to provide advice on whether there...

You have been asked by a men's clothing manufacturer, Nuke, to provide advice on whether there is evidence of differences in the average heights of male citizens in three different countries. You have taken random samples of the heights of males (in cms) in those three countries and your data set is attached in csv delimited format (as a .txt file) using the link on the right. Input the data set into SPSS and perform the appropriate analysis to answer...

You have been asked by the accountant at Playfum Ltd whether the following items should be...

You have been asked by the accountant at Playfum Ltd whether the following items should be recorded as assets, liabilities, equity, income or expenses. Use Framework 2014 to prepare a response to the accountant's enquiry Give reasons for your advise (a) The company provides an annual recreation leave entitlement of 20 days to its employees. If an employee does not take any of the entitlement in a particular year, it is carried forward to following years. (b) Playfurn has entered...

You have been asked by Med Parts Inc, a medical device maker, for advice on whether...

You have been asked by Med Parts Inc, a medical device maker, for advice on whether they are using the right mix of debt and equity to fund their operations. The firm has 120 million shares trading at $ 10 a share and $ 300 million in outstanding debt. The current levered beta for the firm is 1.10 and the pre-tax cost of borrowing is 6%. The marginal tax rate is 40%, the riskfree rate is 5% and the equity...

Y ou have been asked by a men's clothing manufacturer, Nuke, to provide advice on whether...

Y ou have been asked by a men's clothing manufacturer, Nuke, to provide advice on whether there is evidence of differences in the average heights of male citizens in three different countries. You have taken random samples of the heights of males (in cms) in those three countries and your data set is attached in csv delimited format (as a .txt file) using the link on the right. Input the data set into SPSS and perform the appropriate analysis to...

You have been asked by the director of finance to put together a plan to invest...

You have been asked by the director of finance to put together a plan to invest in other companies. Your plan will manage a mutual fund with a $20 million portfolio with a beta of 1.50. Assume that the risk-free rate is 4.50%, and the market risk premium is 5.50%. You expect to receive an additional $5 million, which you plan to invest in a number of stocks. After investing the additional funds, you want the fund’s required return to...

imagine you are a business consultant to ExxonMobil and you have been asked to analyze, advise,and...

imagine you are a business consultant to ExxonMobil and you have been asked to analyze, advise,and create recommendations on how the firm can ensure its future success in it's current market. prepare a minimum of 1050 word analysis of economic data and business data to explain how the core economic principles impact the sustainability of the firm and what actions the firm can take to ensure success. address the following: •identify the market structure of ExxonMobil operates in, analyze its...

You are an analyst at the ABC Corp and have been asked to analyze factors affecting...

You are an analyst at the ABC Corp and have been asked to analyze factors affecting the likely profitability of ABC entering the market for “non-historical” stone arrowheads. Here is a list of facts that you have accumulated about the stone arrowhead industry. • The main input, flint, is produced by about 250 local flint miners. Some of them offer bulk discounts on the amount of flint you order, some do not. • You turn the flint into arrowheads using...

You have been asked to analyze the queue for registrations for a popular MSOM seminar at...

You have been asked to analyze the queue for registrations for a popular MSOM seminar at a major national conference. Conference attendees arrive to register at the rate of 5 people every 15 minutes (Possisson distributed). It takes each host, any number of which can be hired directly through the conference at the cost of $17 per hour, 7 minutes to register a guest, following a negative exponential distrubution. The conference recognizes a waiting cost of $40 per hour per...

Answer the following questions, assuming that you have been asked to analyze a potential acquisition by...

Answer the following questions, assuming that you have been asked to analyze a potential acquisition by your company: (a) Which long-term assets on its financial statements are the most likely to be misstated by their carrying amounts? Explain your reasoning. (b) Is it possible that the company being considered for acquisition has some long-term assets that do not appear on its financial statements at all? Explain why or how this might occur.

In your role as a financial analyst, you have been asked to analyze certain aspects of...

In your role as a financial analyst, you have been asked to analyze certain aspects of working capital management for The Kroger Co. (KR) and Sprouts Farmers Market, Inc. (SFM). In your analysis, you should consider the following: a) Cash conversion cycle. b) Liquidity. c) Short-term financing versus long-term financing.

Question