You've been hired fresh off your MBA as a financial consultant for an organization. The new now for-profit publicly traded firm that is the market leader in kindney dialysis systems (KDSs). The company is looking at stettung up a manufacturing plant overseas to produce a new line of KDSs. This is a five year project.
The company bought some land three years ago for $6 million in anticipation of using it as a toxic dump site for waste chemicals instead. If the land were sold today, the nexxt proceeds woudl be 6.4 million after taxes. The company wants to build its new manufacturing plant on this land: the plant will cost 9.8 million to build. The following market data on the company's securities are current:
Debt $25,000 of 6.5 percent coupon bonds outstanding, 20 years to maturity, selling for 96% of par: the bonds have a $1000 par value each and make semiannual payments.
Common stock: 400,000 share outstanding, selling for $89 per share; the beta is 1.20
Preferred stock 35,000 shares at 6.5% preferred stock outstanding, selling for $99 per share; the preferred have a $100 par value each.
Market: 8% expected market risk remium; 5.20% rish-free rate.
The company's taxe ratre is 34 percent. The project requires $825,000 in initial net working capital investment to get operational and will be recovered in the final year of operation.
The manufacturing plant has an eight year life and the company uses straight line depreciation. At the end of the project (i.e. the end of year 5), the plant can be scrapped for 1.25 million.
The company will incur $2,100,00 in annual fixed costs. The plan is to manufacture 11,000 KDSs per year and sell them at $10,000 per machine, the variable production costs are $9,000 per KDS.
The company's president want you to throw all you calculations, all your assumptions, and everything else into a report for the CFO: all she want to know is what the KDS projects NPV is.
Please so NPV work in excel.