Question 26 1 pts og Inc. is investing in a new portable iguana killing machine

Question

Question 26 1 pts og Inc. is investing in a new portable iguana killing machine that will cost Jake the D $200.000. The machine has a useful life of 6 years and falls into the 5-year property class for the depreciation purposes. The IRS MACRS schedule for the six years is: (1) 20%, (2) 32%, (3) 19.2%, (4) 11.52%, (5) 11.52%, (6) 5.76%. It will generate $50,000 per year of savings for Jake and can be sold for $50.000 at the end of the 6-year period. Jake's corporate tax rate is 34%. In addition, Jake has 2000 outstanding 9% annual coupon bonds with a $1000 par value, 20 years to maturity and a price of $1085. Jake also has 60,000 shares of common stock outstanding that is selling for $45 per share. This stock has a beta of 2.45 (its Jake! he is a risky dog-dude!!), the expected market return is 12% and the risk- free rate is 5%. Finally, Jake has 36,000 shares preferred stock outstanding that pays a 5.5% dividend and sells for $40 per share. Using the WACC and the OCF's what is the NPV of Jake's iguana killing project (do not forget about the sale of the machine at the end)? O$30,546 O$28,768 O $11,430 -$45,987 ?-29,784

Explanation / Answer

WACC = wD*rD *(1-t) + wP*rP + wE*rE where: w = the respective weight of debt, preferred stock/equity, and equity in the total capital structure t = tax rate D = cost of debt P = cost of preferred stock/equity E = cost of equity Cost of Equity Amount of Equity Riskfree rate 5.00% Shares 60000 Beta 2.45 Price 45 Market return 12% Value 2700000 Cost of Equity 22.15% Cost of Debt Amount of Debt Rate 9.00% No.s 2000 Taxrate 34% Price 1085 Cost of Debt 5.94% Value 2170000 Cost of preferred stock Amount of Pref. Stock Rate 5.50% No.s 36000 Price 40 Value 1440000 Total Capital 6310000 WACC 12.78% Calculation of NPV Year Saving (a)(1-tax) Depreciation (b)*tax@34% CFAT (a+b) PVIF @12.78% Present Value 1 33000 13600 46600 0.886682 41319.38 2 33000 21760 54760 0.786205 43052.59 3 33000 13056 46056 0.697114 32106.28 4 33000 7833.6 40833.6 0.618118 25240 5 33000 7833.6 40833.6 0.548074 22379.85 6 33000 3916.8 36916.8 0.485968 17940.37 182038.5 Salvage Value= 50000-tax = 33000*.4859 = 16034.7 NPV =16034.7 +182038.5-200000 =(1926.8)

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