For all of you finance experts out there, I have this finance class that I am taking and need some help for a homework problem. Any help would be greatly appreciated. Thank you.
You have been hired as a financial consultant to Advanced Robotics, Inc. (ARI), a large publicly traded company that is a leading firm in the electronics industry. The company is planning to set up a manufacturing plant overseas to produce a new product, called the “Personal Assistant (PA)”. This will be a five-year project. The company bought some land three years ago for $8 million in anticipation of using it for another project, which was subsequently dropped. The land was appraised last week for $5.75 million. The company wants to build its new manufacturing plant on this land; the plant will cost $8.8 million to build. The following market data on ARI’s securities are current:
Debt: 12,000 7 percent coupon bonds outstanding, 18 years to maturity,
selling for 104 percent of par; the bonds have a $1,000 par value
each and make semiannual payments.
Common Stock: 300,000 shares outstanding, selling for $75 per share; the beta is
1.4
Preferred Stock: 10,000 shares of 7 percent preferred stock outstanding, selling for
$95 per share. The preferred stock have a par value of $100 each.
Market: Expected market risk premium is 8 percent; 20-year Treasury bond
rate is 5.85 percent.
AIR’s tax rate is 35 percent. The project requires $1.25 million in initial net working
Capital investment to get operational.
a. Calculate the project’s Initial cash flow at time period 0.
b. The new product is somewhat riskier than a typical project for ARI, primarily because the plant is located overseas. Management has told you to use an adjustment factor of +3 percent to account for this increased riskiness. Calculate the appropriate discount rate (cost of capital) to use when evaluating ARI’s project.
c. The manufacturing plant has an eight-year tax life, and ARI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $3.5 million. What is the disposal (terminal) cash flow of this project?
d. The company will incur $5 million in annual fixed costs. The plan is to manufacture 15,000 PAs per year and sell them at $12,000 per unit; the variable production costs are $11,000 per PA. What is the annual net operating cash flow from this project?
e. ARI’s president wants to know what the project’s IRR and NPV are (please state all relevant cash flows you are using to do these calculations).
Should the project
You have been hired as a financial consultant to Advanced Robotics, Inc. (ARI), a large publicly traded company that is a leading firm in the electronics industry. The company is planning to set up a manufacturing plant overseas to produce a new product, called the “Personal Assistant (PA)”. This will be a five-year project. The company bought some land three years ago for $8 million in anticipation of using it for another project, which was subsequently dropped. The land was appraised last week for $5.75 million. The company wants to build its new manufacturing plant on this land; the plant will cost $8.8 million to build. The following market data on ARI’s securities are current:
Debt: 12,000 7 percent coupon bonds outstanding, 18 years to maturity,
selling for 104 percent of par; the bonds have a $1,000 par value
each and make semiannual payments.
Common Stock: 300,000 shares outstanding, selling for $75 per share; the beta is
1.4
Preferred Stock: 10,000 shares of 7 percent preferred stock outstanding, selling for
$95 per share. The preferred stock have a par value of $100 each.
Market: Expected market risk premium is 8 percent; 20-year Treasury bond
rate is 5.85 percent.
AIR’s tax rate is 35 percent. The project requires $1.25 million in initial net working
Capital investment to get operational.
a. Calculate the project’s Initial cash flow at time period 0.
b. The new product is somewhat riskier than a typical project for ARI, primarily because the plant is located overseas. Management has told you to use an adjustment factor of +3 percent to account for this increased riskiness. Calculate the appropriate discount rate (cost of capital) to use when evaluating ARI’s project.
c. The manufacturing plant has an eight-year tax life, and ARI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $3.5 million. What is the disposal (terminal) cash flow of this project?
d. The company will incur $5 million in annual fixed costs. The plan is to manufacture 15,000 PAs per year and sell them at $12,000 per unit; the variable production costs are $11,000 per PA. What is the annual net operating cash flow from this project?
e. ARI’s president wants to know what the project’s IRR and NPV are (please state all relevant cash flows you are using to do these calculations).
Should the project
