The following data relates to the new Robots: The new robots carry an Initial Investment outlay $11,000,000
Question:
The following data relates to the new Robots: The new robots carry an Initial Investment outlay $11,000,000 that includes cost of the robots, shipping and installation, a working capital parts inventory to keep these expensive machines in operation, and the cost of financing via and external source because Jay Spreadsheet knows that cash on the balance sheet only equals $75,000; i.e., practically zero in the overall context; so, they will have to seek external financing. A very reliable financial advisor with significant commercial experience in the area of external financing alternatives between debt vs. equity financing for projects indicated to Jay Spreadsheet that he should use a Convertible Bond which itself will carry a Flotation Cost equal to 6% of the project. Jay now wishes he hadn’t skipped the last slide in his professor’s external financing lecture about how flotation costs affect capital budgeting. But, he knows that he must understand how the Flotation Cost of 6% affects the project. The Robots will have an estimated four year life, and have no salvage value at the end. Depreciation is straight-line to zero. Sales are projected at 310 units per year. Price per unit will be $325,000, variable costs will be $199000 per unit, and Fixed Costs will be $6,100,000 per year. The company requires a 19 percent required rate of return on any new project, and the relevant tax rate is 21%. Mr. Silver-Spoon has asked Jay Spreadsheet to provide answers to the following questions:
1. Within the context of the Economic Cycle, describe and discuss Sources of Value related to this project. What is the reasonableness of this project being undertaken from Sources of Value practicalities? Discuss pros and cons using ideas you may surface from the Economic Cycle. 2. 2-a: Calculate the base-case Net Present Value. 2-b: Construct a NPV Profile 2-c: Calculate the IRR 3. Based upon the conclusion to #2-a, 2-b, and 2-c, does this project clear the rational economic hurdle for you to proceed? Explain your observations.
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson