A $8M investment is considered by an electric bike manufacturing company to add a new production line for its new product, electric skateboards. The company has commissioned an exploratory study of where to place the new production line and which type of equipment to use. There are three types of machines to choose from for the company to install on the new assembly line. The machines have zero salvage value at the end of 10-year planning horizon. The company must select at least two alternatives from 

(i) Loan,

 (ii) Common Stocks to obtain the required amount of capital for the investment. 

Each of these capital sources could provide $4M to support the project. The company is anticipating rapid product penetration and aggressive growth after addition of the new production line. The major question for this case study is to find out if the project is economically justified. 

Create the cash flow of the project and obtain its economic worth. 

Choose the Capital Sources and Calculate WACC 

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• Options 

Capital Sources Description 

1 Loan Interest Rate = 8 %, Compounded Semi Annually Payback Method: Plan 3 

2 Preferred Stock Dividend = $7, Price = $100, Brokerage Fee = $3 

3 Common Stock Dividend = $5, Price = $100, Growth Rate = 4% 

4 Retained Earning

Answer rating: 100% (QA)

To calculate the cash flow of the project and determine its economic worth we need to consider the initial investment operating cash flows and termina... View the full answer