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28 Sep 2019
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.
- The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
- Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
- If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
- Now calculate the IRR for the project. Is this an acceptable project. Why/why not? Is there a conflict between answer and the answer to #1
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.
- The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.
- Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.
- If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?
- Now calculate the IRR for the project. Is this an acceptable project. Why/why not? Is there a conflict between answer and the answer to #1
Beverley SmithLv2
28 Sep 2019