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Trouble with Finance Question
A project will produce sales of $500 in one month. Sales are projected to grow by 0.5% each subsequent month until the project ends after 60 months. Costs are $200 per month. The project requires the purchase of a machine that costs $12,000 which depreciates to zero over 8 years. You think the machine will be worthless at project end. At the beginning of each month you must have NWC equal to 40% of end-of-month sales.
The cost of the project at t=0 (an investment is required to buy the machine and for NWC at t=0) will be funded by issuing debt and equity. You will issue a bond with face value=$5,000, maturity 5yrs, coupon rate=6%, and YTM=8%. You raise the remainder by issuing stock. The firm's annual WACC is 15%. Tax rate is 35%. 1. What is NPV of the project? 2. What is the cost of equity? 3. What would be the total value of the project (D E) if no leverage was used? |
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