Reference no: EM132697993

UoA Ltd has designed a new product and conducted a market survey costing $500,000 to assess its viability. The survey has determined that the new product will generate sales of $9,000,000 per year. Annual total cost (excluding depreciation expense) will come to $1,770,919

The equipment necessary for production will cost $8,000,000 and is to be depreciated evenly over the project's life of 4 years (prime cost method). In addition, $250,000 in net working capital is required to fund the project. The tax rate is 30%.

The company believes the risk of the new project is the same as the risk of the company's existing assets.

UoA's capital consists of the following:

Ordinary Shares:

The company has 1,5 million ordinary shares outstanding, currently sell for $50 per share and a beta of 1.6.

The market risk premium is 12% and risk free rate is 5%

Preference shares:

The company has 200,000 preference shares, currently sell for $45 and pay $5 dividend.

Bonds:

The company has 150,000 bonds outstanding that mature in 5 years with an annual coupon of 7.5%, making half yearly payments. The bonds have a face value of $1,000 and currently sell in the market for $1080.

(a) Calculate the company's weighted average cost of capital (WACC)

(b) Using the NPV criterion, should the project go ahead?