The Doncaster branch of the Commonwealth Bank of Australia is considering installing cash machines to provide 24-hour services to their customers.
The cash machines are expected to replace 4 full-time employees who earn an annual salary of $80,000 per person in the current year, after which it is expected to grow at 2% annually. For simplicity, assume the salaries are paid annually at the end of each year.
The operating cost of all the cash machines is expected to be $50,000 yearly. These cash machines are expected to last 4 years and be sold for $70,000 at the end of 4 years of operation. It will cost $900,000 to purchase and install the machines today and an additional $5000 for maintenance in the second year of operation.
70% of the fund for the project is financed through debt which has a cost of 5% p.a. The shareholders require an additional  6% p.a. on what creditors earn.
a) Draw the timeline and set out the cash inflow, cash outflow and net cash flow for each year.  
b) Calculate the weighted average cost of capital (WACC) of this project            
c) Calculate the Net Present Value (NPV) of this project and explain if this project should be accepted according to the NPV rule.        
d) If the credit rating of the Commonwealth Bank of Australia has been downgraded due to the impact of Covid-19 on the local economy, holding other factors constant, how would this change affect its cost of debt, i.e. Kd, and the cost of equity, i.e.  Ke? Explain briefly.       

Answer rating: 100% (QA)

a Timeline and Cash Flows Year 0 Initial investment 900000 Year 1 Cash inflow 0 Cash outflow salaries 320000 4 employees x 80000 Cash outflow operatin... View the full answer