I've submitted 3 different questions for this same problem: (problem 5-7)

The Cuba Project

Santiago Old Car Parts (SOCP) is considering a new venture (or project) that hopes to take advantage of the opening of business investment in Cuba. Using proprietary software, CNC milling machines, and the latest technology in 3D printing, the firm can design and fabricate affordable car parts for old, classic cars that have no other sources of parts.

The market study has been completed and the interns have made the following forecasts for the project.

? Initial investment:

o SOCP has found a production site and will purchase the equipment to support the

project. The equipment, including shipping and installation is expected to cost (t=0) $

7,398,000.

o The investment in Inventory needed for the project is expected to be $575,000 with an

expected increase in Accounts Payable of $259,000.

o The equipment falls into the IRS 5-year class life using the MACRS depreciation method

with the 1?2 year convention. The IRS depreciation table is:

Year Depreciation (% of depreciable basis

1 20.00%

2 32.00%

3 19.20%

4 11.52%

5 11.52%

6 5.76%

• ?The program (project) is planned to continue for 9 years. At the end of the project the equipment will be salvaged (sold). The forecasts predict that the equipment can be sold then for $265,000.
• ?The Net Operating Working Capital (Inventory and Accounts Payable) is expected to be liquidated at the end of the project (Year 9).
• ?The project is expected to operate as a new division and the projection for new sales revenues is:

-Estimated sales in year 1:$1,750,000

-Sales are expected to grow by

? 25% in year 2,

? 20% in year 3,

? 15% per year in years 4 and 5, and then

? 5% per year thereafter.

-? Production cost forecasts are:

o Fixedcosts:$200,000peryear.

o Annual variable costs: 45% of revenue.

-? SOCP has a marginal tax rate (T) of 34%.

• ?The firm's beta is 1.43,
• ?The risk free rate of return (rrf) = 3.05%,
• ?The market risk premium (rm - rrf) = 4.25%,
• ?The firm's analysts have partially prepared information for SOCP's cost of capital at various

levels of debt and equity:

Cost of Capital & Capital Structure Worksheet(see chart)