The horizon of the project is estimated to be 2 years, with the following sales forecasts:...
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The horizon of the project is estimated to be 2 years, with the following sales forecasts: Sales_1=$0.9 million and Sales_2= $1.9 million. The project requires purchasing a machine that costs $1.8 million, and can be depreciated using the straight-line method down to zero book value over 4 years. Annual variable costs are estimated to be 20% of current year sales. The CFO believes that the machine can be sold at the end of the project, t=2, for $0.9 million. Net working capital requirements are estimated to be as follows: zero immediately; 20% of current year sales at t=1; and zero at t=2, when NWC will be fully liquidated. The project will use existing office space for which the company paid $1,550,000 three years ago and could be rented out for $40,000 a year to be paid at the end of each year for the next two years. Vandalay's marginal corporate tax rate is 20%. The cost-of-debt of Vandalay Industries is currently at 5% per year, their beta of equity is 1.5, and their debt-to-equity ratio is 0.25. The project will be financed using the same capital structure as the firm. Given their conservative debt levels, the debt can be assumed risk-free, while the market risk-premium is estimated to be 6%. What is the NPV of the project? (Dollar figures should be approximated to the nearest cent of a dollar, while rates should be expressed in percentage terms without using the "%" symbol and approximated to the nearest second decimal place.) The horizon of the project is estimated to be 2 years, with the following sales forecasts: Sales_1=$0.9 million and Sales_2= $1.9 million. The project requires purchasing a machine that costs $1.8 million, and can be depreciated using the straight-line method down to zero book value over 4 years. Annual variable costs are estimated to be 20% of current year sales. The CFO believes that the machine can be sold at the end of the project, t=2, for $0.9 million. Net working capital requirements are estimated to be as follows: zero immediately; 20% of current year sales at t=1; and zero at t=2, when NWC will be fully liquidated. The project will use existing office space for which the company paid $1,550,000 three years ago and could be rented out for $40,000 a year to be paid at the end of each year for the next two years. Vandalay's marginal corporate tax rate is 20%. The cost-of-debt of Vandalay Industries is currently at 5% per year, their beta of equity is 1.5, and their debt-to-equity ratio is 0.25. The project will be financed using the same capital structure as the firm. Given their conservative debt levels, the debt can be assumed risk-free, while the market risk-premium is estimated to be 6%. What is the NPV of the project? (Dollar figures should be approximated to the nearest cent of a dollar, while rates should be expressed in percentage terms without using the "%" symbol and approximated to the nearest second decimal place.)
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Answer rating: 100% (QA)
SOLUTION To calculate the NPV of the project we need to calculate the cash flows for each year discount them to their present value at the cost of cap... View the full answer
Related Book For
Fundamentals of Corporate Finance
ISBN: 978-0133400694
1st canadian edition
Authors: Jonathan Berk, Peter DeMarzo, Jarrad Harford, David A. Stangeland, Andras Marosi
Posted Date:
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