+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
Portfolio Return At the beginning of the month, you owned $6,200 of Company G, $8,500 of Company S, and $2,000 of Company N. The monthly returns for Company G, Company S, and
Calculate the profit or loss from the following long/short strategy: You short sell 600 shares of ABC stock at $95 per share and immediately buy the S&P 500 index for half of
Why do you think mutual funds are such popular investment vehicles? Why doesn’t management simply diversify its operations? Isn’t that what management is supposed to do?
Calculate the Yield to Maturity of 10 bonds that have a stated rate of 6 1/3%, mature in 5 1/2 years, and are currently priced at 102.244. Calculate the Yield to Maturity of 2
You own two bonds: a 5-year and a 10-year bond, each with a 7% annual coupon. Both bonds currently sell at par. How much will the price of each bond change if interest rates i
Investment company is instructed to minimize the risk for an investor with $1,200,000 to invest. Stock funds cost $50 with a return of 10%. Money market fund costs $100 and an
An environmental consultant is considering the installation of a water storage tank for a client. The tank is estimated to have an initial cost of $417,000, and annual mainten
Simpkins Corporation is expanding rapidly, and it does not pay any dividends because it currently needs to retain all of its earnings. However, investors expect Simpkins to be