I want a professionally presented and well-organized document. The Edmonton Fabricating Company (EFC) manufactures snow blowers. EFC is...

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I want a professionally presented and well-organizeddocument.
The Edmonton Fabricating Company (EFC) manufactures snowblowers. EFC is investigating the feasibility of a new line ofcordless snow blower. The new manufacturing equipment to producethe new line of snow blower will cost $750,000. The installationcosts are expected to be $25,000, the setup costs are expected tobe $30,000 and the training costs are expected to be $15,000. Thecompany has just finished a marketing feasibility and this studystrongly endorses going ahead with a further financial study toevaluate the overall feasibility of the project. The cost of themarketing study was $35,000. The projected useful life of the newequipment is 8 years and the project unit sales are expected to be:YEAR UNIT SALES 1 3,000 2 3,300 3 3,500 4 3,700 5 4,000 6 4,250 74,300 8 4,300 The new cordless snow blower would be priced to sellat $250 per unit and the variable operating costs are expected tobe 50% of sales. After the first year, the sales price is estimatedto increase by 3% every year. The total fixed operating costs areexpected to be $200,000 per year and would remain constant over thelife of the project. The project would require $45,000 in workingcapital at the start (time period zero). The entire amount ofworking capital will be recovered at the end of the project. Theestimated salvage value of the equipment after 8 years is $55,000.The marginal tax rate is 35%. The CCA rate of the equipment is 30%.The company uses the DCF model to determine the cost of retainedearnings and new common stock. You have been provided with thefollowing data: D0 = $1.00; P0 = $25.00; g = 7.00% (constant) andF=10.00%. The company’s 8.00% coupon rate, semi-annual payment,$1,000 par value bond that matures in 20 years sells at a price of$1,100. The new bonds would be privately placed with no flotationcosts. The target capital structure is 50% debt, 30% common equity(retained earnings) and 20% equity (new common stock). REQUIRED:What is the net present value of this project? Should the projectbe undertaken by Edmonton Fabricating Company (EFC)?

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Solution The formula of the constant growth rate model is as follows P0 D0 1 g Ke g 25 1 1 007 Ke 007 25 Ke 007 107 Ke 1128 Hence the Ke is 1128 P0 is the price of the share as of now D0 is the dividend paid g is the growth rate Ke is the cost of equity The formula to calculate the cost of debt Kd is as follows Kd Coupon amount Maturity value B0 n maturity value B0 2 40 1000 1100 40 1000 1100 2 357 semi annually 357 2 714 pa Hence the Kd is 714 B0 is the value of bond as on now n is the total number of periods in case of semiannual payments number of periods 2 The overall cost of the company or the weighted average cost of capital WACC can be calculated See Answer

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I want a professionally presented and well-organizeddocument.The Edmonton Fabricating Company (EFC) manufactures snowblowers. EFC is investigating the feasibility of a new line ofcordless snow blower. The new manufacturing equipment to producethe new line of snow blower will cost $750,000. The installationcosts are expected to be $25,000, the setup costs are expected tobe $30,000 and the training costs are expected to be $15,000. Thecompany has just finished a marketing feasibility and this studystrongly endorses going ahead with a further financial study toevaluate the overall feasibility of the project. The cost of themarketing study was $35,000. The projected useful life of the newequipment is 8 years and the project unit sales are expected to be:YEAR UNIT SALES 1 3,000 2 3,300 3 3,500 4 3,700 5 4,000 6 4,250 74,300 8 4,300 The new cordless snow blower would be priced to sellat $250 per unit and the variable operating costs are expected tobe 50% of sales. After the first year, the sales price is estimatedto increase by 3% every year. The total fixed operating costs areexpected to be $200,000 per year and would remain constant over thelife of the project. The project would require $45,000 in workingcapital at the start (time period zero). The entire amount ofworking capital will be recovered at the end of the project. Theestimated salvage value of the equipment after 8 years is $55,000.The marginal tax rate is 35%. The CCA rate of the equipment is 30%.The company uses the DCF model to determine the cost of retainedearnings and new common stock. You have been provided with thefollowing data: D0 = $1.00; P0 = $25.00; g = 7.00% (constant) andF=10.00%. The company’s 8.00% coupon rate, semi-annual payment,$1,000 par value bond that matures in 20 years sells at a price of$1,100. The new bonds would be privately placed with no flotationcosts. The target capital structure is 50% debt, 30% common equity(retained earnings) and 20% equity (new common stock). REQUIRED:What is the net present value of this project? Should the projectbe undertaken by Edmonton Fabricating Company (EFC)?