Suppose you have been hired as a financial consultant to Trader Joe's to evaluate introducing a new soda line. The cost of each new can of soda will be $0.81 and Trader Joe's will sell each can for $0.95. The project will last for seven (7) years. Trader Joe's will need to build a new manufacturing plant at a cost of $320,000,000.00. They will use land that is currently valued at 5.00 million dollars the following market data on Trader Joe's securities are current:
Debt: 175,000, 8.50% coupon bonds outstanding, 20 years to maturity, selling for 95,00% of par; the bonds have a $1000 par value each and make semiannual payments.
Common Stock: 22,000,000.00 shares outstanding, selling for $75.00 per share; the beta is 2.80
Market: 7.00% expected market risk premium; 1.00% risk-free rate.
Trader Joe's tax rate is 35.00%. The project requires $12.00 million in initial net working capital investment to get operational. The manufacturing plant has an 7-year tax life, and Trader Joe's uses straight line depreciation. At the end of the project (that is, the end of the year 7), the plant an equipment can be scrapped for $5,000,000.00. The company will incur $11,000,000.00 in annual fixed costs. Trader joe's project sale of 960.00 million cans of soda per year. Should trader joe's go ahead with this project (use both NPV and IRR rules)?