Given the following information, calculate the weighted average  cost of capital (WACC) for ANDI  Construction Inc.

Percent of capital structure:
 
Preferred stock.................      10%
Common equity...............      40
Debt.................................      50
 
Additional information:
 
Corporate tax rate..............................         35%
Dividend, preferred...........................       $7.00
Dividend, expected common.............       $1.25
Price, preferred..................................    $85.00
Growth rate........................................           8%
Bond yield.........................................         4.5%
Flotation cost, preferred....................       $1.75
Price, common...................................      $48.00

ANDI is evaluating the purchase of a new crane system for $1,000,000. If they purchase this system, revenues will increase by $250,000 and associated expenses will increase by 65% of revenues. The installation of the system is expected to cost $100,000 and require training of another $25,000. Because of the increase in business expected by the purchase of the system Accounts Receivable is expected to increase by $30,000. The company expects to use this machine for 10 years after which it will have no salvage value. Assume simplified straight-line depreciation and that this machine has been depreciated down to zero, a 20% marginal tax rate, and a required rate of return of the WACC you previously calculated.

1.   What is the initial outlay associated with this project?

2.   What are the annual after-tax cash flows associated with this project for years 1 through 9?

3.   What is the terminal cash flow in year 10 (what is the annual after-tax cash flow in year 10 plus any additional cash flows associated with termination of the project)?
 
 -What is the project's Payback, Net Present Value, Internal Rate of Return, and Profitability Index?  

what is your decision about the acceptability of this investment? Should ANDI acquire this asset? Explain your decision.

Answer rating: 100% (QA)

The WACC is computed as shown below cost of debt x 1 tax rate x weight of debt cost of equity x weight of equity cost of preferred stock x weight of p... View the full answer