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$7.$ Apply WACC to capital budgeting $($Hint: for this question, it is useful to review the Baldwin

Capital Budgeting example in Week $4)$:

Thunderbolt Corporation is considering an investment project to produce electric gadgets.

Cathie Wood projected unit sales of these gadgets to be $10,000$ in the first year, with growth

of $8$ percent each year over the subsequent five years $($so the total project life is six years$).$

$4$

Production of these gadgets will require $$1,500,000$ in net working capital to start. The net

working capital will be recovered at the end of the project. Total fixed costs are $$3,000,000$

per year, variable production costs are $$330$ per unit, and the units are priced at $$840$ each.

The equipment needed to begin production will cost $$8,400,000.$ The equipment will be

depreciated using the straight$-$line method over a six$-$year life and has a pre$-$tax salvage value

of $$1,000,000$ when the project closes. The tax rate is $21\%.$

a$)$ Set up a table that shows your detailed calculation of the project cash flows for each year

throughout the life of the project. Include this table in your case study write$-$up or submit the

Excel spreadsheet together with your case write up by email.

b$)$ Using the cost of capital that you found in part $4$c above $($if you have difficulty in determining

the WACC in part $4$c$,$ then assume $6\mathrm{.}5\%$ as the cost of capital for this question$)$ as the

required rate of return, what are the NPV and IRR of this project?

c$)$ Should Thunderbolt Corporation accept or reject this project? Why or why not?

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