The Project:

ConsumerCo is contemplating introducing a new consumer product.

It is forecast that this product will generate sales of $900,000 in the coming year. Sales are expected to grow with inflation at 3% per year for the next 6 years. There will be no sales after 6 years.

Cost of goods sold will be 50% of net sales.

Total capital investment will be $1,250,000. Shipping and installation costs of $100,000 will also be incurred. Equipment will be depreciated using the MACRS 5-year schedule (factors are shown on the spreadsheet).

Equipment can be sold for $200,000 at the end of the project. Since the equipment will be fully depreciated at that time, ConsumerCo will have to pay taxes on the gain on sale.

A market research study was conducted last year at a cost of $100,000.

You need to calculate the WACC for use in your calculations. Use this information to do so:

1. The company currently has a $100 million bond issue outstanding that matures in ten years. The bonds have a coupon rate of 10% and are currently selling at 113.42% of par. The companys tax rate is 38%.
2. The company has 10 million shares of common stock outstanding with a par value of $1 per share. The shares are currently selling in the market at $20 per share. The company has no preferred stock.
3. The current risk-free rate is 4%. The company uses a market risk premium of 6%. The common stock of the company has a beta of 1.5.

$1 million in bonds with an 8% coupon will be sold to aid in financing.

The company owns a piece of land that is suitable for the project. They purchased the land in 1990 for $50,000. They could sell the land today for $125,000. This opportunity cost must be included in the cash flow forecast.

Inventories and accounts receivable will each increase $50,000. Accounts payable will increase $20,000. These changes in net working capital will be reversed at the end of the project.

• Develop a cash flow forecast for the project.
• Find the weighted average cost of capital for use in your calculations.
• Find the net present value and internal rate of return for the project.
• Should ConsumerCo do the project? Why or why not?