Sports EX Inc. is a Sports Shoes Company which is considering investing in a new equipment for the production of a new line of Tennis and Football Shoes for its elite customers. The new equipment will cost $250,000, and an additional $80,000 is needed for installation. The equipment which falls into the MACRS 3-yr class, would be sold after three years for $35,000. The equipment will generate additional annual revenues of $210,000, and will have annual operating expenses of $60,000. An inventory investment of $60,000 is required during the life of the project. Sports EX is in the 30 percent tax bracket, and has the same risk as the firm’s existing assets.The capital required for the project has been arranged as follows:Debt: 1,000 8%, 10-year, semi-annual coupon bonds with a par value of $100, each selling for 90% of its face valueCommon stock: 2,500 shares selling for $96 each with a beta of 1.05. The market’s rate of return is 11% and risk-free investments offer a 4% return.Determine the terminal cash flow for year 3.Determine the FCF for years 1-3 and Compute the project’s NPV .Estimate the project’s IRR .Should the project be accepted?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Sports EX Inc. is a Sports Shoes Company which is considering investing 
in a new equipment for the production of a new line of Tennis and 
Football Shoes for its elite customers. The new equipment will cost 
$250,000, and an additional $80,000 is needed for installation. The 
equipment which falls into the MACRS 3-yr class, would be sold after 
three years for $35,000. 
The equipment will generate additional annual revenues of $210,000, 
and will have annual operating expenses of $60,000. An inventory 
investment of $60,000 is required during the life of the project. 
Sports EX is in the 30 percent tax bracket, and has the same risk as 
the firm’s existing assets.
The capital required for the project has been arranged as follows:
Debt: 1,000 8%, 10-year, semi-annual coupon bonds with a par value of 
$100, each selling for 90% of its face value
Common stock: 2,500 shares selling for $96 each with a beta of 1.05. 
The market’s rate of return is 11% and risk-free investments offer a 
4% return.Determine the terminal cash flow for year 3.
Determine the FCF for years 1-3 and Compute the project’s NPV .
Estimate the project’s IRR .Should the project be accepted? 

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