Caldwell Inc evaluates the following potential expansion project for the growth of the company. The company...

 

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Caldwell Inc evaluates the following potential expansion project for the growth of the company. The company is under the 40% tax bracket and intends to invest $50 million initially in the project. After five years of the horizon, cash flows from the project will grow at a constant rate of 6%. Table 1: Projected Cash Flow from the Expansion Project (figures in millions of dollars) 2023 2024 2025 2026 2027 $105.00 $126.00 $151.00 $174.00 $191.00 130 142 15 16 9 10 20 4 1 Net sales 2 Costs of goods sold Selling & admin. Expense 3 4 Depreciation 5 EBIT 6 Interest 80 10 8 7 6 94 12 8 12 5 113 13 9 (a) What is the appropriate discount rate for valuing the Project? (b) What are the NPV and IRR of the Project? (c) Do the sensitivity and risk analysis of the project 16 4 23 4 The Caldwell Inc bond yield is 9% and its market predetermined beta is 1.2, the risk-free rate is 7%, and the market risk premium is 5%. Answer the following questions: (14) Caldwell Inc evaluates the following potential expansion project for the growth of the company. The company is under the 40% tax bracket and intends to invest $50 million initially in the project. After five years of the horizon, cash flows from the project will grow at a constant rate of 6%. Table 1: Projected Cash Flow from the Expansion Project (figures in millions of dollars) 2023 2024 2025 2026 2027 $105.00 $126.00 $151.00 $174.00 $191.00 130 142 15 16 9 10 20 4 1 Net sales 2 Costs of goods sold Selling & admin. Expense 3 4 Depreciation 5 EBIT 6 Interest 80 10 8 7 6 94 12 8 12 5 113 13 9 (a) What is the appropriate discount rate for valuing the Project? (b) What are the NPV and IRR of the Project? (c) Do the sensitivity and risk analysis of the project 16 4 23 4 The Caldwell Inc bond yield is 9% and its market predetermined beta is 1.2, the risk-free rate is 7%, and the market risk premium is 5%. Answer the following questions: (14)

Answer rating: 100% (QA)

Answer a To determine the appropriate discount rate for valuing the project we need to consider the cost of capital for the company Since the company is under the 40 tax bracket it can deduct the inte... View the full answer