| 1) | Weights of debt | 30% |
| | Weights of common equity (no preferred equity) | 70% |
| | Tax rate | 35% |
| | Cost of debt | 9% |
| | Beta of the company | 1.2 |
| | Risk free rate | 2% |
| | Return on the market | 12% |
| | CAPM=Risk Free Rate + Equity Beta *Market Risk Premium |
| | Market Risk Premium= Return on Market - Risk Free Rate |
| | Cost of equity | 14.00% |
| | Cost of debt | 5.85% |
| | WACC | 11.56% |
| 2) | Initial investment outlay | $60 | million |
| | ($50 million for machinery with $10 million for net working capital) |
| | Project and equipment life is | 5 | years |
| | Revenues are expected to increase | $50 | million annually |
| | Gross margin percentage | 60% |
| | Depreciation is computed at the straight line rate for tax purposes |
| | Selling, general, and administrative expenses | 5% | of sales |
| | Tax rate | 30% |
| | | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| | Revenue | 50 | 100 | 150 | 200 | 250 |
| | Gross margin | 30 | 60 | 90 | 120 | 150 |
| | Selling, general, and administrative expenses | 2.5 | 5 | 7.5 | 10 | 12.5 |
| | Before tax | 27.5 | 55 | 82.5 | 110 | 137.5 |
| | tax expense | 8.25 | 16.5 | 24.75 | 33 | 41.25 |
| | After Tax | 19.25 | 38.5 | 57.75 | 77 | 96.25 |
| | Depreciation | 10 | 10 | 10 | 10 | 10 |
| | Annual Cash Flow | 29.25 | 48.5 | 67.75 | 87 | 106.25 |
| | | | | | Year | Cash Flow |
| | | | | | 0 | ($60) |
| | | | | | 1 | $29.25 |
| | | | | | 2 | $48.50 |
| | | | | | 3 | $67.75 |
| | | | | | 4 | $87.00 |
| | | | | | 5 | $106.25 |
| | | | | | NPV | $171.67 |
| | | | | | IRR | 76.07% |
songsongsong
calculation_.xlsx
