Hamilos Worldwide is considering a 5 million expansion of their existing business. The initial expense...
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Hamilos Worldwide is considering a 5 million expansion of their existing business. The initial expense will be depreciated straight-line over years to zero salvage value; the pretax salvage value in year 5 will be $500,000. The project will generate pre-tax gross earnings of $1,500,000 per year, and not change the risk level of the firm. Hamilos can obtain a 5-year 12.5% loan to partially finance the project. If undertaken, this project should maintain a target D/E ratio of 1.50. If the project were financed with all equity, the cost of capital would be 15%. The corporate tax rate is 30%, and the risk-free rate is 6%. The project will require a $100,000 investment in net working capital. a. Compute the NPV using WACC:
b. Alternatively, suppose you finance the project with 3 million in debt. What is the APV of the project? c. Do you take the project?
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