You are a financial manager of a forestry company. Your firm wants to consider selling Christmas trees seasonally for the next three years. Adjacent to the company headquarters is a parking lot owned by your firm. You can sell your trees from this lot. However, if you do not use the lot to sell your Christmas trees, then the lot can be leased for $100 per year. Fixed assets for this project will include a small portable office and a fence to secure the trees. These items will cost $900 and be depreciated on a straight-line basis over three years. Because the tree stand is only open seasonally, the fence and office will need to be stored the rest of the year. Storage expense will be $50 per year. After the three years the office and fence will be worthless and thrown away. The trees will be sold on a cash basis so accounts receivable and accounts payable will not change, but inventories will increase by $75 immediately to purchase rope and netting to secure the trees on your customer’s car roofs. When the stand closes in three years you will no longer need this additional inventory. Your firm has already spent $100 studying the Christmas tree market.

You expect to sell 1,000 trees each year at a price of $7 per tree. Your costs of growing and harvesting (Cost of goods sold) the trees is $6 per tree. Marketing and other costs associated with this project (SGA) are estimated to be $50 per year.

Your firm’s tax rate is 20%.

Your firm has $1,000 of debt (bond) outstanding. The coupon rate on your outstanding bond is 4%. The bond pays an annual coupon and has a maturity of 5 years. Currently, the bond trades for a price of $965.17. Your firm has no preferred stock outstanding, but does have $3,000 of common stock outstanding. The cost of common stock is 12%.

• What are the annual cash flows for the Christmas tree stand project (You may attach a separate sheet if needed)?

• What is the YTM on your firm’s debt?

• What is the WACC for your firm?

• What is the NPV of this project?

• What is the IRR of this project?

• What is the payback period for this project?

• According to the NPV rule, should your firm take on this project? According to the IRR rule, should your firm take on this project? If your firm has decided that only projects with a payback period of 1.5 years or less should be accepted, should your firm take on this project?

Answer rating: 100% (QA)

1 Year 0 975 Year 1 700 Year 2 700 Year 3 775 2 480 3 996 4 82343 5 53 6 139 years 7 NPV take the project because the NPV is higher than 0 IRR take th... View the full answer