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Federated Manufacturing is considering a major capital expenditure to begin production of a major new product. Key facts and assumptions about this new product appear below. Using this information, answer the questions following. Federated Manufacturing is considering a major cap a. Estimate Federated's equity beta b. Estimate Federated's cost of equity capital c. Estimate Federated's weighted-average cost of capital d. Estimate the after-tax cash flows relevant to the investment. Assume the salvage value is realized in year 8 and working capital is liquidated in year 9. e. Estimate the investment's net present value f. Estimate the investment's internal rate of return. Does the investment appear attractive financially? g. Estimate the present value of the investment's economic value added. (Note that the salvage value is captured in the annual EVAs.) h. In market value terms, Federated's debt to capital ratio is 40%. Assume the company will finance the investment in the same proportions and estimate the cash flows from and to equity. (Assume the company will use an 8-year, 7% loan to be repaid in equal annual installments.) i. Estimate the net present value of the equity cash flows. (That is, analyze the investment from the equity perspective.) j. Estimate the internal rate of return to equity. k. Why is the NPV from the entity perspective higher than the NPV from the equity perspective, while the IRRs are in just the reverse order?

Facts and Assumptions
Yield to maturity on long-term government bonds					5.0%
Yield to maturity on company long-term bonds					7.0%
Market price of risk					6.9%
Estimated company and project asset beta					0.70
Stock price per share					$ 60
Number of shares outstanding					2	million
Market value of interest-bearing debt outstanding					80	million
Tax rate					35.0%
Inflation rate					3.0%
Initial cost of investment					$ 200	million
Year 1 selling price per unit					$ 80
Year 1 variable manufacturing cost per unit					$ 55
Year 1 general selling & administrative expenses					$ 200	million
Expected project life					8	years
Salvage value					40	million
Depreciation schedule					Straight-line
Working capital					20.0%	as percent of sales
Year	0	1	2	3	4	5	6	7	8
Unit sales in millions	-	2	10	20	23	24	23	22	15

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