Problem:
MT 217 can manufacture the new PDA for $200 each in variable costs. Fixed costs for the operation are estimated to run $4.5 million per year. The estimated sales volume is 70,000, 80,000, 100,000, 85,000, and 75,000 per each year for the next five years, respectively. The unit price of the new PDA will be $340. The necessary equipment can be purchased for $16.5 million and will be depreciated on a 5 year straight-line schedule.
Net working capital investment for the PDAs will be $6,000,000 this year. Of course NWC will be recovered at the projects end. MT 217 has a 35 percent corporate tax rate.
MT 217 's capital structure is 40% debt with an after-tax cost of 8% and 60% equity costing 16%, Sherry has asked Doug to prepare a report that answers the following questions:
1. What is MT 217 's WACC, which will be used as the required rate of return for this project?
2. What is the IRR of the project?
3. What is the NPV of the project, based on the WACC (required rate of return)?