You and your friends have decided to examine the potential of starting a series of restaurants in and around college campuses in Boston that cater exclusively to students. Assume that (together) you have $120,000 (equity) for this project which requires an initial investment of $200,000. The remaining amount of $ 80,000 can be raised through issuing bonds. You are given the following additional information about the project.
Year Free Cash Flow
1 $ 20,000
2 $ 40,000
3 $ 60,000
4 $ 80,000
5 $ 100,000
Beta based on similar businesses 2.00
Risk Free Rate 4.50% / year
Market Risk Premium 8.00% / year
Price per Bond $ 1,050
Face Value of Bonds $ 1,000
Coupon Rate on Bonds 8.50 %
Coupons Paid Monthly
Maturity of Bonds 5 years
Tax rate for firm 30%
Will you accept or reject this project? Why?
Please show your work to help me going forward.© BrainMass Inc. brainmass.com October 25, 2018, 9:46 am ad1c9bdddf
This solution deals with issues under finance and shows how to calculate the weighted average cost of capital and net present value with step-by-step calculations enclosed in an Excel file.
Net Present Value Incremental Analysis
The following contains cost and benefit information for two different alternatives for a w capital investment in computerized process technologies to control the process at a manufacturing plant (this is a tremendous upgrade from the current process).
ITEM CMM-PLC Option FMS-Integrated Option
Initial Investment $ 15,000,000 $ 18,000,000
Annual O&M Costs
Annual Labor Costs 500,000 520,000
Annual Material Costs 498,000 450,000
Annual Overhead Costs 1,500,000 1,600,000
Annual Tooling Costs 225,000 230,000
Annual Income Taxes 950,000 975,000
Net Annual Benefits $ 6,500,000 $ 7,000,000
(revenue increase & maintenance savings)
Net Salvage Value $ 500,000 $ 750,000
Use internal rate of return (IRR) and the appropriate incremental analysis to determine the best alternative. Use 8% as the minimum attractive rate of return (MARR) and assume an 8 YEAR useful life for both projects.View Full Posting Details