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Would you recommend that felicia amp fred move forward with

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Reference no: EM13586567

Determine the target weighted average cost of capital for Felicia & Fred, given following assumptions:

  • Weights of 30% debt and 70% common equity (no preferred equity)
  • A 35% tax rate
  • The cost of debt is 9%
  • The beta of the company is 1.2
  • The risk free rate is 2%
  • The return on the market is 12%

Use the CAPM for calculation of the cost of equity.

Calculate the cash flows of the project given the following assumptions:

  • Initial investment outlay of $60 million, comprised of $50 million for machinery with $10 million for net working capital (metal and gemstone inventory)
  • Project and equipment life is five years
  • Revenues are expected to increase $50 million annually
  • Gross margin percentage is 60% (not including depreciation)
  • Depreciation is computed at the straight line rate for tax purposes
  • Selling, general, and administrative expenses are 5% of sales
  • Tax rate is 30%, a reduced rate that reflects a tax credit due to the repurpose of the building

Compute net present value and internal rate of return of the project.
Would you recommend that Felicia & Fred move forward with this project based on the NPV and IRR rules and outcomes? Why or why not? Consider any qualitative aspects of the decision as well. Provide a response with quantitative details which will be presented for consideration at the next executive board meeting.

Reference no: EM13586567

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