XYZ Company is evaluating an investment project. The project involves establishing a new facility to assemble...

  

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XYZ Company is evaluating an investment project. The project involves establishing a new facility to assemble medical equipment in a sparsely populated area of northern Newfoundland and Labrador in response to a mandate of the federal government to support employment in the region. The current unemployment rate is high at 13% in Newfoundland and Labrador. Company XYZ, Inc. is considering the purchase of new equipment for $1,250,000 for this project. The salvage value of the equipment after 8 years will be $20,000. The new equipment will be subject to 30% CCA. It is expected to generate additional revenue of $4,200,000 per year with related expenses of 1,800,000 for 8 years before taxes. XYZ is in the 32% tax bracket. The company's goal is to reach 10% revenue growth annually. In addition to equipment, the land will be purchased for $250,000, which could be sold after 8 years for $500,000. XYZ capital structure is 33% equity and 67% debt, XYZ is planning to use the same capital structure to finance this project. The current Tbill rate is 3%, and it is estimated that investors expected rate of return on the market is 5%. XYZ could borrow funds at 10% before tax. Required rate of return on equity (un-levered) is 12%, levered cost of equity is 24.43%. To provide incentives to firms, the federal government is offering a subsidy for operating costs to a maximum of $20,000 per year for 8 years. The $20,000 represents before-tax savings, and these are taxable. The flotation cost for this project will be $65,000. The debt would be issued for a 8- year term and would pay annual interest only, with all principal to be repaid at maturity. maturity. There is some opposition to this project due to some potential environmental impact. One of the company's strategic goals is to maintain good relations with local communities. Calculate NPV (Net Present Value) of this project using the WACC (Weighted Average Cost of Capital) method. Please include all calculations for the full mark XYZ Company is evaluating an investment project. The project involves establishing a new facility to assemble medical equipment in a sparsely populated area of northern Newfoundland and Labrador in response to a mandate of the federal government to support employment in the region. The current unemployment rate is high at 13% in Newfoundland and Labrador. Company XYZ, Inc. is considering the purchase of new equipment for $1,250,000 for this project. The salvage value of the equipment after 8 years will be $20,000. The new equipment will be subject to 30% CCA. It is expected to generate additional revenue of $4,200,000 per year with related expenses of 1,800,000 for 8 years before taxes. XYZ is in the 32% tax bracket. The company's goal is to reach 10% revenue growth annually. In addition to equipment, the land will be purchased for $250,000, which could be sold after 8 years for $500,000. XYZ capital structure is 33% equity and 67% debt, XYZ is planning to use the same capital structure to finance this project. The current Tbill rate is 3%, and it is estimated that investors expected rate of return on the market is 5%. XYZ could borrow funds at 10% before tax. Required rate of return on equity (un-levered) is 12%, levered cost of equity is 24.43%. To provide incentives to firms, the federal government is offering a subsidy for operating costs to a maximum of $20,000 per year for 8 years. The $20,000 represents before-tax savings, and these are taxable. The flotation cost for this project will be $65,000. The debt would be issued for a 8- year term and would pay annual interest only, with all principal to be repaid at maturity. maturity. There is some opposition to this project due to some potential environmental impact. One of the company's strategic goals is to maintain good relations with local communities. Calculate NPV (Net Present Value) of this project using the WACC (Weighted Average Cost of Capital) method. Please include all calculations for the full mark

Answer rating: 100% (QA)

Calculation of NPV 1 Cost of Equity RiskFree Rate Tbill rate 3 Market Risk Premium expected rate of ... View the full answer