Dj vu' Incorporated currently processes seafood with a unit it purchased several years ago. The unit, which originally cost $500,000, has a current book value of $250,000. Dj vu' Inc. is considering replacing the existing unit with a newer, more efficient one. The new unit will cost $750,000 and will also require an initial increase in net working capital of $40,000 (t=0). The new unit will be depreciated on a straight-line basis over five years to a zero balance. The existing unit is being depreciated at a rate of $50,000 per year. Dj vu' Inc. expects to sell the existing machine today for $275,000. Dj vu' Inc. tax rate is 30%.

If Dj vu' Inc. purchases the new unit, annual revenues are expected to increase on an annual basis by $100,000 (due to increased capacity), and annual operating costs (exclusive of depreciation) are expected to decrease by $20,000 per year. Annual revenues and operating costs are expected to remain constant at this new level over the five-year life of the project (so no adjustment should be made to these incremental cash flows). Accumulated net working capital will be fully recovered at the end of five years.

current assets 200'000 Debt 480000

fixed assets 1'000'000 Equity 720000

Dj vu' Inc. has an equity beta = 1.30, its cost of debt is 10% per annum and the risk-free rate of return and market return are 8% and 14% respectively.

a) Calculate the project's initial net investment.

b) If Dj vu' Inc. considers its current capital structure to be optimal (refer to balance sheet provided previously) how should it fund the project? (Hint: Construct Dj vu' Inc. balance sheet after the initial investment and determine how much is funded through debt and how much through a seasoned equity issue).

c) Calculate the annual net operating cash flows for the project.

d) Calculate Dj vu' Inc. cost of equity and weighted average cost of capital.( Show Calcultation of WACC)