You have been hired as a consultant by Chug and Slug Unlimited to determine if the company should proceed with a new set of crab mallets to sell to Maryland crab lovers. Chug and Slug projects sales of 30,000 packs per year for 4 years at a price of $29 for each pack. Variable costs are $12 per pack, and fixed costs are $225,000 per year. New machinery to produce the mallets will cost $500,000 and be depreciated straight-line over 4 years. There is no expected salvage value for the machinery. Current Assets, specifically inventory, of $150,000 will be established in the first year and maintained for the duration of the project. Assume that the company will be able to sell the inventory at cost at the end of the project. Chug and Slug's incremental tax rate is 35%. Equity investors are lining up to finance this project and have an expected return target of 16% (i.e. required return). They will allow 25% debt financing. Banks with whom you have consulted will lend money for this venture at an interest rate of 9%, and have also imposed a maximum debt / assets ratio of 25%. (Note: if the project cash flows exceed the required returns of equity investors and the bank financiers, you get to keep the excess as a bonus for a job well-done!)
Your mission: 1) Determine the WACC for this project. 2) Create a preformed income statement and preformed cash flows for the project. 3) Determine the NPV and IRR of the project.