+1-415-670-9189
info@expertsmind.com
Report annual cash flows
Course:- Financial Management
Reference No.:- EM13301




Assignment Help
Expertsmind Rated 4.9 / 5 based on 47215 reviews.
Review Site
Assignment Help >> Financial Management

Suppose your friend, Pat, approaches you with a plan to get in on the solar panel leasing business. Pat has identified an opportunity to acquire panels sufficient to power 25 homes. On average, Pat estimates that your enterprise will incur a cost of $1,000 for each installation. After that, each home installation will operate maintenance free and generate approximately $50 per month of revenue for 10 years.

Assume that due to the rapid rate of technological depreciation, there will be neither demand nor salvage value for these solar panels at lease expiry.

Assume you'll face a 40 percent tax rate. For tax purposes, you'll be able to depreciate the total cost of equipment and installation over 5 years in a straight-line manner.

Your required return can be estimated from Solarplex, a publicly traded pure-play solar panel leasing company with a beta of 2 and a debt-to-equity ratio of 1. You estimate that returns on a balanced market portfolio are 12 percent and the risk-free rate of borrowing is 4 percent.

Suppose, first, that Pat proposes you form an all-equity enterprise to invest in this opportunity. What is the maximum price you should pay for this inventory of panels? Report annual cash flows, even if you decide to use a compact formula for direct calculation. Use the APV/WACC method (recall, they're the same for a firm w/ no debt).

Suppose the seller is asking $50,000 for the total inventory of solar panels. Additionally, assume you can borrow $25,000 at 8 percent in the form of a five-year, interest-only loan, with the total principal retired via a balloon payment due in year 5. Does this investment make sense? Report annual cash flows, even if you decide to use a compact formula for direct calculation. Briefly explain why you are using the computational method chosen. (Hint: you will need to decide to use the APV or WACC formula. It is possible to compute either
/ both. But be careful -- given the nature of the debt-share-of-value in this project, one of these approaches is much more complicated than the other.)

Finally, assume that after lengthy negotiations, the seller will not take less than $42,000 for the panels you need. Through continuing research, however, Pat discovers that one-in-ten firms that have gone into this business have gone bankrupt.




Put your comment
 
Minimize


Ask Question & Get Answers from Experts
Browse some more (Financial Management) Materials
The Dulac Box plant produces wooden packing boxes to be used in the local seafood industry. Current operations allow the company to make 500 boxes per day, in two 8-hour shift
Simms Corp. is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC or negativ
Indirect Effects on Project Cash Flow,  Provide an example of an Opportunity Cost that would arise in your firm when considering a new project.
Project Cash Flows You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ult
Calculate the times interest earned ratio for next year assuming the firm raises $40 million of new debt at an interest rate of %6  Calculate the times burden covered ratio fo
Find the future value at the end of 12 years of $66,000 invested 5 years from today at an interest rate of 7.4 per cent compounded semiannually. It is April 1, 2016 and you ne
Portman Industries just paid a dividend of $2.16 per share. Th company expects the coming year to be very profitable, and its dividend is expected to grow by 12% over the next
Bud and Katie Milner file a joint return. During the year, they paid $11,000 to their nanny to look after their three children, ages 2, 9, and 11. Bud and Katie both work and