Question

Use the following information to answer....

The Project:

ConsumerCo is contemplating introducing a new consumer product.

It is forecast that this product will generate sales of $900,000 in the coming year. Sales are expected to grow with inflation at 3% per year for the next 6 years. There will be no sales after 6 years.

Cost of goods sold will be 50% of net sales.

Total capital investment will be $1,250,000. Shipping and installation costs of $100,000 will also be incurred. Equipment will be depreciated using the MACRS 5-year schedule (factors are shown on the spreadsheet).

Equipment can be sold for $200,000 at the end of the project. Since the equipment will be fully depreciated at that time, ConsumerCo will have to pay taxes on the gain on sale.

A market research study was conducted last year at a cost of $100,000.

You need to calculate the WACC for use in your calculations. Use this information to do so:

The company currently has a $100 million bond issue outstanding that matures in ten years. The bonds have a coupon rate of 10% and are currently selling at 113.42% of par. The company’s tax rate is 38%.

The company has 10 million shares of common stock outstanding with a par value of $1 per share. The shares are currently selling in the market at $20 per share. The company has no preferred stock.

The current “risk-free” rate is 4%. The company uses a market risk premium of 6%. The common stock of the company has a beta of 1.5.

$1 million in bonds with an 8% coupon will be sold to aid in financing.

The company owns a piece of land that is suitable for the project. They purchased the land in 1990 for $50,000. They could sell the land today for $125,000. This “opportunity cost” must be included in the cash flow forecast.

Inventories and accounts receivable will each increase $50,000. Accounts payable will increase $20,000. These changes in net working capital will be reversed at the end of the project.

Develop a cash flow forecast for the project.

Find the weighted average cost of capital for use in your calculations.

Find the net present value and internal rate of return for the project.

Should ConsumerCo do the project? Why or why not?

Use an excel sheet