Reviewing and need help figuring out this one, I\'d appreciate answers and just

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Reviewing and need help figuring out this one, I'd appreciate answers and just a brief explanation if possible

Thanks

M.L., Inc. produces and sells soft drinks. The company is considering whether or not to offer a new, healthy drink called M’s Lemonade. The company’s chief financial officer has collected the following information about the proposed product:

The company will have to purchase new equipment which will cost the company $24 million to purchase and install.

The equipment will be depreciated on a straight-line basis to a $4 million salvage value over its 10-year project life.It is anticipated that the equipment will in fact be sold for $4 million in year 10.

To date, the company also spent $2 million to research the best formula for the drink (e.g. focus groups and surveys).

The new drink is expected to generate sales revenue of $20 million per year for each of the next 10 years, and 25% of the revenue is from lost sales of existing products.

Because of the project, the company will need additional working capital of $1 million which can be liquidated at the end of 10 years.

The firm has already paid a consulting company $125,000 for analysis of the healthy drink market.

The firm will incur additional operating costs of $6 million per year to produce the new drink.

M.L.’s stock price is $32.They just paid a dividend of $2 and the market consensus is for constant 5% dividend growth forever.

M.L.’s bonds sell for $902.They pay semi-annually; have 10 years to maturity, a coupon rate of 6% and par value of $1,000.

The company’s marginal tax rate is 40%.

The target capital structure of the project is 60% equity and 40% debt.

Which of the following are NOT relevant cash flows?

M.L.’s cost of debt (YTM) is _____%.

M.L.’s cost of equity is _____%.

M.L.’s WACC is ______%.

The initial cash flow of the project is $_______ million.

The project’s cash flow in year 7 is $________ million.

The project’s cash flow in year 10 is $________ million.

The NPV of the project is $_________ million.

The IRR of the project is ______%.

Explanation / Answer

Working for depreciation

Years Initial Investment and Working Capital Turnover 75% x 20m Depreciation Other Expenses Before Tax
NCF Taxes -
@ 40% After Tax NCF = cash flow before tax - tax +Depreciation Disc Factor =8.23% Discounted
Cash flow 0 ($25,000,000) $0 $0 ($125,000) ($125,000) $50,000 ($75,000) 1.0000 ($24,075,000) 1 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.9240 $5,802,458 2 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.8537 $5,361,229 3 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.7888 $4,953,551 4 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.7288 $4,576,875 5 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.6734 $4,228,841 6 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.6222 $3,907,272 7 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.5749 $3,610,157 8 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.5312 $3,335,634 9 $15,000,000 ($2,200,000) ($6,000,000) $6,800,000 ($2,720,000) $6,280,000 0.4908 $3,081,986 10 $5,000,000 $15,000,000 ($2,200,000) ($6,000,000) $10,800,000 ($4,320,000) $8,680,000 0.4534 $3,935,892 OCF $65,125,000 NPV $18,718,894 IRR 13.75%

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