Reference no: EM133111890

Question:

MBA Corp plans to use its idle building that can potentially be rented for $15,000 per annum to set up a manufacturing machinery there.

The current Revenue of MBA Corp is $500,000. If the company takes up this project, its revenue is expected to increase by 30% for the next three years and then double (from the 3rd year level) for the next two years.

After 5 years, the project will be scrapped and the salvage value is expected to be $80,000

The COGS are expected to remain the same at 60% of revenue. The SG&A and other operating costs will increase by $10,000.

The cost of the machinery is expected to be $250,000. The machinery installation cost is expected to be $20,000. This investment will require additional inventory of $40,000 and increase the accounts payable by $20,000

The company spent $5000 in researching the viability of the building for machine installation.

The company hires you as a financial manager to advise if they should take up this project or not.

Other information: Full 100% depreciation is taken for the CAPEX in the year in which it is done

Tax rate = 25%

For calculating WACC, please use the below information:

Cost of new Debt: 8%

Cost of Preferred Shares: 6%

Cost of Equity: Need to calculate

Beta = 1.2 Rf = 2% RM-Rf = 6%

Target Capital Structure: Debt : Preferred Sh : Equity =3 : 1 : 6

Answer the flowing questions:

1. What is the initial outlay?(Show the working as to what items are included)

2. Calculate Cost of Equity using CAPM:

3. Calculate WACC

4. Fill in the below income statement

2022 2023 2024 2025 2026

Revenue

COGS

Gross Profit

SG&A/Other costs

Depreciation

EBIT

Interest

EBT

Tax

Net Profit

5. Calculate Operating Cash Flow for the 5 years

2022 2023 2024 2025 2026

EBIT (1-Tax)

Add: Depreciation

FCF

6. What is the Terminal Value (Show the working)

7. Calculate NPV