The Cactus Pillow company has an investment opportunity that will last for 4 years. The project will require $2,300 of new fixed assets to implement. These fixed assets will be depreciated on a straight-line basis over 6 years. Inventory will need to increase by $500 and accounts payable will increase by $200 when this project begins. This project is expected to produce sales of $950 in the first year and sales are expected to grow at a rate of 6% per year for the remaining life of the project. Total expenses (including depreciation) is expected to be 65% of sales. At the end of 4 years the project will terminate. The fixed assets are projected to be sold for $700 and inventory and accounts payable will return to their pre-project levels. Cactus' tax rate is 21%.

 Cactus has $750 of debt outstanding with a YTM of 7% and 1,400 shares of common stock outstanding. The common stock has a market price of $1/share and a cost of 14%.

 

What is Cactus' Weighted average cost of capital? 

What are the annual cash flows associated with this project? 

What is the project's NPV?

 Should Cactus take on this project? Why?

Answer rating: 100% (QA)

Answer I i Cactus Weighted average cost of capital WACC is calculated as follows ii WACC Cost of equ... View the full answer