Problem:
Montreal Manufacturing Company needs to purchase new machines to meet the demand for its product. The cost of the equipment is $100,000. It is estimated that the firm will increase operating cash flow (OCF) by $22,000 annually for the next seven years. The firm is financed with 40% debt and 60% equity, both based on market values. The firm's cost of equity is 16% and its pre-tax cost of debt is 8%. The flotation costs of debt and equity are 2% and 8%, respectively. Assume the firm's tax rate is 34%.
Required:
Question 1: What is the firm's WACC?
Question 2: Ignoring flotation costs, what is the NPV of the proposed project?
Question 3: What is the weighted average flotation cost, fA, for the firm?
Question 4: What is the dollar flotation cost of the proposed financing?
Question 5: After considering flotation costs, what is the NPV of the proposed project?
Note: Show supporting computations in good form.