Reference no: EM131261533
Capital Budgeting
Dylan Corporation is considering investing in a new asset. The asset would cost $24,000,000 with an 8 year useful life. It is believed the asset would have a salvage value of $0 after its useful life and Dylan plans to depreciate the asset under the straight line method. It is estimated the following relevant cash flows will occur each year over the asset’s useful life:
Units sold per year 300,000
Selling price per unit $50
Variable cost per unit $15
Total fixed costs $1,500,000
Dylan plans to keep its current capital financing mix of sixty percent debt and 40 percent equity. The current cost of debt financing (before tax) is 6 percent and the current cost of equity financing (before tax) is 15 percent. Dylan’s marginal tax rate is 35 percent.
Required:
1. Calculate the appropriate discount rate.
2. Calculate the project’s relevant cash flows.
3. Calculate the project’s:
a. simple payback in years
b. NPV
c. IRR
4. Should Dylan invest in the project? Why or why not?
5. How many units must be sold per period in order to yield a NPV equal to $0?
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Capital budgeting-calculate the appropriate discount rate
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