Reference no: EM13586567

Determine the target weighted average cost of capital for Felicia & Fred, given following assumptions:

• Weights of 30% debt and 70% common equity (no preferred equity)
• A 35% tax rate
• The cost of debt is 9%
• The beta of the company is 1.2
• The risk free rate is 2%
• The return on the market is 12%

Use the CAPM for calculation of the cost of equity.

Calculate the cash flows of the project given the following assumptions:

• Initial investment outlay of $60 million, comprised of $50 million for machinery with $10 million for net working capital (metal and gemstone inventory)
• Project and equipment life is five years
• Revenues are expected to increase $50 million annually
• Gross margin percentage is 60% (not including depreciation)
• Depreciation is computed at the straight line rate for tax purposes
• Selling, general, and administrative expenses are 5% of sales
• Tax rate is 30%, a reduced rate that reflects a tax credit due to the repurpose of the building

Compute net present value and internal rate of return of the project.
Would you recommend that Felicia & Fred move forward with this project based on the NPV and IRR rules and outcomes? Why or why not? Consider any qualitative aspects of the decision as well. Provide a response with quantitative details which will be presented for consideration at the next executive board meeting.