1. It's been a long winter sitting at home during the pandemic. Steve already a successful...

 

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1. It's been a long winter sitting at home during the pandemic. Steve already a successful entrepreneur has some great ideas to expand his existing wholesale grocery business into the retail food distribution business. For this, he will need to buy new packaging equipment that will cost extra money--he figures upfront capital costs of $4.8 million (gross) and training and installing expenses of $100,000 each. His bankers estimate his pre-tax cost of debt is 7%, his preferred share cost of capital is 9% and his common equity cost of capital is 12%. His assumed capital structure is 40% 20%:40%, respectively. For planning purposes he assumes this new business will operate for five years and generate annual pre-tax cash flows of $1,600,000 per year. The operation will also requires upfront additional working capital/inventory of $200,000. During Covid, the government announced an upfront one time non-taxable credit to businesses that will reduce his stated gross initial investment by $1.0 million. a. What should Steve do? His firm's CCA rate is 30% and tax rate 25%. Show all your calculations. With hindsight he now thinks his after-tax cash flows are too high and more likely to be only $600,000 per year. How does this change your answer? Show all your calculations. 1. It's been a long winter sitting at home during the pandemic. Steve already a successful entrepreneur has some great ideas to expand his existing wholesale grocery business into the retail food distribution business. For this, he will need to buy new packaging equipment that will cost extra money--he figures upfront capital costs of $4.8 million (gross) and training and installing expenses of $100,000 each. His bankers estimate his pre-tax cost of debt is 7%, his preferred share cost of capital is 9% and his common equity cost of capital is 12%. His assumed capital structure is 40% 20%:40%, respectively. For planning purposes he assumes this new business will operate for five years and generate annual pre-tax cash flows of $1,600,000 per year. The operation will also requires upfront additional working capital/inventory of $200,000. During Covid, the government announced an upfront one time non-taxable credit to businesses that will reduce his stated gross initial investment by $1.0 million. a. What should Steve do? His firm's CCA rate is 30% and tax rate 25%. Show all your calculations. With hindsight he now thinks his after-tax cash flows are too high and more likely to be only $600,000 per year. How does this change your answer? Show all your calculations.

Answer rating: 100% (QA)

To analyze Steves investment decision we need to calculate the net present value NPV of the project Well start with the initial cash outflows and then ... View the full answer