Problem 1. "We can evaluate the target WACC for Apex Printing, given these assumptions
• Weights of 40% debt and 60% common equity (no preferred equity)
• Return on the market is 11%
• Beta of the company is 1.5
• Cost of debt is 8%
• Risk-free rate is 2%
• A 35% tax rate
"Do we have each and everything we need on sales and costs?" you ask. "It must be time to evaluate the net present value (NPV) and internal rate of return (IRR) of the Apex expansion project."
"We have the data from James and Luke regarding projected sales and costs, respectively, for the food packaging project," says Mary. "It is feasible to project that we can receive a tax break from this implementation. I have information from our audit firm, which shows that future depreciation methods for taxes will be straight-line; Thus, the corporate rates will be reduced to 35% as we assumed in our weighted average cost of capital (WACC) calculation."
"You will use the WACC you computed last week and apply this work to the computation of the NPV and comparison for IRR."
Problem 2.
• Initial investment outlay of $30 million, consisting of $25 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year
• Project and equipment life: 5 years
• Sales increase: $25 million annually
• Consider gross margin of 60% (exclusive of depreciation)
• Depreciation: Straight-line for tax purposes
• Selling, general, and administrative expenses: 10% of sales
• Tax rate: 35%
Evaluate NPV and IRR of the project using the Excel spreadsheet. "Use the IRR financial function for the computation of IRR."
Problem 3.
• Initial investment outlay of $20 million for equipment only
• Project and equipment life: 5 years
• Sales projected to increase $12 million annually
• Consider gross margin of 50% (exclusive of depreciation)
• Depreciation: Straight-line for tax purposes
• Selling, general, and administrative expenses: 10% of sales
• Tax rate: 35%
As you reach for the weighted average cost of capital (WACC) that you evaluated previously and the same spreadsheet from the original expansion project.