PolarTech Inc. is considering producing a new widget. The production equipment, costing $12 million, will depreciate over a six-year period. Upon full depreciation, the equipment's resale value is estimated at $2.5 million. The widget's retail price is $200, with an anticipated annual sales volume of 150,000 units. Fixed costs are projected at $900,000 annually, and variable costs amount to $15 per widget. Initial project startup requires a net working capital investment of $1,200,000. No additional working capital is needed during the project. The applicable tax rate is 25%. Using Excel, calculate the IRRs and NPVs for this project using the WACCs under the following scenarios. (WACC you calculate in "a" and WACC you calculate in "b") a) PolarTech Inc. can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:1 (50 percent debt, 50 percent equity). b) PolarTech Inc. can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:3 (25 percent debt, 75 percent equity).

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter9: Capital Budgeting And Cash Flow Analysis

Section: Chapter Questions

Problem 4P

See similar textbooks

Related questions

Question

PolarTech Inc. is considering producing a new widget. The production equipment, costing $12 million, will depreciate over a six-year period. Upon full depreciation, the equipment's resale value is estimated at $2.5 million. The widget's retail price is $200, with an anticipated annual sales volume of 150,000 units. Fixed costs are projected at $900,000 annually, and variable costs amount to $15 per widget. Initial project startup requires a net working capital investment of $1,200,000. No additional working capital is needed during the project. The applicable tax rate is 25%.

Using Excel, calculate the IRRs and NPVs for this project using the WACCs under the following scenarios. (WACC you calculate in "a" and WACC you calculate in "b")

a) PolarTech Inc. can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:1 (50 percent debt, 50 percent equity).

b) PolarTech Inc. can obtain debt funding at 8 percent. Its marginal income tax rate is 25 percent. The yield on US Treasury securities is 3 percent. The market risk premium is 6.0 percent, and the firm’s beta is 2. It has a targeted debt-to-equity ratio of 1:3 (25 percent debt, 75 percent equity).

Expert Solution