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We are evaluating a project that costs $1,550,000, has a six-year life and has no salvagevalue. Assume that depreciation is straight-line to zero...
1. We are evaluating a project that costs $1,550,000, has a six-year life and has no salvagevalue. Assume that depreciation is straight-line to zero over the life of the project.Sales are projected at 82,000 units per year. Price per unit is $34.25, variable cost perunit is $20.50 and fixed costs are $750,000 per year. The tax rate is 35 percent and youhave the following information about the capital structure of the firm. Do this problemin Excel and attach the spreadsheet.
Book Value of Debt $2,500,000,000
Market Value of Debt $2,750,000,000
Book Value of Equity $3,500,000,000
Market Value of Equity $4,500,000,000
Expected Dividend for next year $2.35
Growth rate of dividends 4%
Current stock price $23.50
Bond information Coupon rate = 5%, maturity = 15 years,maturity value =$1,000 and the current priceis 1,117.63. Assume interest is paidsemiannually.
a. Calculate cash flow and NPV. What is the sensitivity of NPV to changes in thesales figure. Explain what your answer tells you about a 500-unit decrease inprojected sales.b. What is the sensitivity of OCF to changes in the variable cost figure? Explainwhat your answer tells you about a $1 decrease in estimated variable costs.
a. Calculate cash flow and NPV. What is the sensitivity of NPV to changes in thesales figure. Explain what your answer tells you about a 500-unit decrease inprojected sales.b. What is the sensitivity of OCF to changes in the variable cost figure? Explainwhat your answer tells you about a $1 decrease in estimated variable costs.
