Your firm’s SVP of Finance asked you to evaluate an investment opportunity that the development team proposed. Here are some pro-forma financial forecasts for the investment opportunity: (in $)

Year	0	1	2	3	4	5
Sales revenue		12,000.00	12,108.00	12,241.19	12,388.08	12,536.74
Costs of goods sold		5,000.00	5,045.00	5,100.50	5,161.71	5,223.65
SG&A, incl. Depreciation		2,250.00	2,270.25	2,295.22	2,322.76	2,350.63
EBIT		4,750.00	4,792.75	4,845.47	4,903.61	4,962.46
Interest expense		305.00	307.75	311.14	314.87	318.65
Taxable income		4,445.00	4,485.00	4,534.33	4,588.74	4,643.81
Income tax expense (23%)		1,022.35	1,031.55	1,042.90	1,055.41	1,068.08
Net Income		3,422.65	3,453.45	3,491.43	3,533.33	3,575.73
Depreciation		750.00	756.75	765.07	774.25	783.54
Capital Expenditure	23,600.00	1,300.00	1,311.70	1,326.13	1,342.04	1,358.14
Net Working Capital level	7,900.00	8,075.00	8,147.68	8,237.30	8,336.15	8,436.18

These new operations would be very similar to your firm’s existing operations, in terms of growth, riskiness, and optimal capital structure. They are expected to produce cash flows indefinitely. UFCF growth of 1.1% is expected after year 5.

Some information about the firm's balance sheet and cost of capital:

Market value of long-term debt $1,300,000.00

Number of shares outstanding 520,000

Most recent share price $17.50

Return on debt 5.700%

Stock beta 1.446

Risk-free rate 2.700%

Market risk premium 6.100%

Income tax rate 23.0%

The SVP is thinking of raising the firm’s leverage ratio to 15% in the near future, so the new operations should (in anticipation of that change) start with (and then maintain) a leverage ratio of 15.0%. With that leverage, lenders would expect a return of 6.2%.

The SVP asked you to evaluate this project: Is it a good idea? Explain carefully, and provide all useful information the SVP may want to see. Use the WACC in your answer. Show your work.

Answer rating: 100% (QA)

Yes the project is a good idea The project has a positive net present value and the internal rate of return is greater than the weighted average cost ... View the full answer