The Empire is planning to create the first ever Death Star. Darth Vader, the Emperor’s right hand man and the manager of the project, has asked you to evaluate the project. Here is some of the information that you need to evaluate the project.
The equipment costs are around IC 100,000 (where IC is the imperial credit) plus IC 60,000 more for installation.
In order to operate the Death Star, working capital has to increase by IC 40,000 which will be recovered at the end of the project.
As the Emperor has foreseen it, the project is expected to last 4 years after which the equipment will be destroyed by the Rebellion. However, some parts of the project will be salvaged and sold for IC 20,000 to the Ewoks. Depreciation is based on straight-line method with zero salvaged value.
Each planet that Darth Vader destroys costs the empire IC 10,000 but at the same time, it brings in IC 25,000 per planet destroyed from other fearing planets. Each year the empire plans to destroy 10 planets.
The Death Star is a big-machine and therefore incurs a fixed cost of IC 75,000 to operate each year.
In order to set an example, the Empire Department of Tax charges a 40% tax rate on the Death Star; however they give a tax shield for borrowing money.
To finance this project, the Empire will borrow 40% of the initial outlay from the Banking Clan at a pre-tax rate of 12.50%. The other 60% will come by selling equity to the Separatist Group. The selling price per share of the Empire is IC 100 and is expected to grow at the constant rate of 11.67% forever. The next dividend will be of IC 5. The lenders of the capital require high rate of return because this is a risky project and has never been done before.
What is your recommendation for the Death Star project to Darth Vader? If you believe that you cannot do this analysis, Darth Vader has given you the following warning: “I find your lack of faith disturbing.”
Remember, Darth Vader does not like simple answers; you need to provide proper explanation. Please write a short persuasive memorandum with your choice, to build or not to build, and rationale as to why you made this determination. You might use some fancy terms with numbers, such as net present value or weighted average cost of capital to assist you. Numbers always impress people! There are many blank templates available on a Word document. Just click on the file tab at the top and left of the page and then click on new. Just a few paragraphs will suffice; however, take caution in the words you choose - they may be your last.