Stewiacke Ltd. is currently considering a project with a 4-year life that it believes has the potential to return the company to profitability. Having completed a market survey at the cost of $50,000, it is now ready to undertake a capital budgeting analysis of the project. The following information has been collected for the purpose of determining the project's net present value (NPV).
The project will require an initial investment of $8 million that will be split equally between a new building and new equipment. The project will also require an investment of $500,000 in additional net working capital that will be released at the conclusion of the project.
Stewiacke intends to build on a block of land that it purchased last year for $2 million. The land has a current market value of $2.5 million and independent appraisers have indicated that its value should grow at an average annual rate of 3% over the next 10 years. The equipment is estimated to have a 4-year useful life, at the end of which it is expected to have a zero salvage value. The building is estimated to have a 15-year useful life, with an expected salvage value at the end equal to 25% of its original cost. At the end of year 4, the building is expected to be worth 50% of its original cost. Both the building and equipment will be depreciated on a straight-line basis for accounting purposes.
It is estimated that the project will generate gross revenues of $6 million per year, with costs of goods sold expected to be 55% of gross revenues.
Finally, Stewiacke's marginal tax rate is 30% and its weighted average cost of capital is 10%. The applicable CCA rates on the new building and the new equipment are 15% and 7.5%, respectively.
Required
a. Estimate the initial after-tax cash outlay for the proposed project.
b. Estimate the net present value associated with the proposed project.
c. Should Stewiacke Ltd. go ahead with this project? Briefly explain.
d. Given that Stewiacke presently has 10 million common shares outstanding that are trading at $10.00 per share, what will be the new price per share if the firm accepts this project, assuming the markets are efficient?