finance-The current assembler will last another 4 years

QUESTION

The current
assembler will last another 4 years; however, the new machine could generate
more revenues. The new assembler would
generate revenues of $1,250,000/year and because of new technology the cash
expenses will only be $525,000/yr. The
current machine can produce $725,000 in revenue per year and only has cash
expenses of $425,000. It would cost
$200,000 to ship a new machine to the plant and there would also be an
additional installation cost of $72,000 for an updated electrical service. The new machine will cost Sniff-it-Out
$923,000. The new machine will have a
service life of 4 years. The company
will depreciate the machine on a straight line basis and at the end of 4 years
it will have a cash value of $50,000 and a book value of 0. The book value on the current machine is
$50,000, today. It will be depreciated
down to 0 over the next 4 years, also using straight line depreciation. The current machine could be sold for
$125,000, today and at the end of another 4 years it could be sold for
$30,000. Tomas (currently the CFO) noted
that the new machine would need an additional $60,000 in inventory if it were
purchased. The partners agreed that
purchasing the new machine might be a good idea; however, they all agreed that
the decision hinged on two items, more analysis and proper financing. The company can obtain financing for this
project at 11 % from the local bank. The
11% cost does not take into effect the company’s current tax rate of 28%.
The Financial Picture
In
early 2002 Sniff-it-Out went public. It
was decided at that time that 20 % of the company’s stock should be issued as
tracker stock (tracker stock helps banks, employees and other with a vested
interest to value the company).
Annotated Financial Information
Year Earnings Dividends
Year-end
Per
Share Per
Share Stock Price
2002 1.05 .32 11.25
2003 1.15 .33 12.40
2004 1.30 .38 13.70
2005 1.55 .46 15.10
2006 1.58 .48 16.35
2007 1.65 .50 17.33
2008* 1.76 .61 19.38

*2008 figures are
an estimate.

Tomas also noted
that the theft recovery division is estimated to increase at a 13% growth rate
for the next 2 years in spite of the economic slowdown that is occurring in
other business sectors of the country.
“This is reflects our best corporate estimates. Now that the military is interested in our
product, we have opened an entirely new market for surveillance devices. Hopefully the economy will continue to grow
at the same pace as last year and the bad times are behind us” said Tomas as he
was looking over the latest financials.

A local security
analyst with Norris and Company estimated that the stock has a beta of 1.85 and
is considered a strong buy. The markets that have an over all
expected market return of 9.25%.

Balance
Sheet 2008 (000’s)
Cash 230 Current Liab 580
Acc’t
Rece 310 Bonds 5,000
Inventory 875 Preferred Stock
1,000
Total Current Assets 1,415 Common
Stock 300
Plant and Equipment 9,040 Ret
Earnings 3,575
Total Assets 10,455 Total Liab& Eq. 10,455

Current Market Data
Bonds Preferred Stock Common Stock
Price $1147.20
$110.00 $19.35

1)
There are 300,000 share of common stock issued and
outstanding.
2)
The bonds have an 8% annual coupon and are due December
31, 2020.
3)
Par value for the common stock is $1.00.
4)
Par Value for the preferred stock is $100.00.
5)
Preferred stock pays a 6% dividend on an annual basis.
6)
Government T-Bonds are currently paying 5%.

New GPS
Transponders
Sniff-it-Out can purchase a new, more accurate GPS transponder
to enhance the location accuracy. The
new transponder will give the company an accuracy that is currently only
available with conventional aerial surveillance equipment. Jerry Jones, the head of the computer mapping
software department, prepared the following information and forwarded it in a
memo for the executive team.
________________________________________________________________________
MEMO
September 23

The
theft recovery unit is currently selling at $700 (wholesale, to the
dealers). The fixed cost on the receiver
equipment is $400,000. The total
variable costs on the software last year was $2,873,000 due to GPS adjustments
for different locations. Last year 6500
units were sold.

I
estimate that if we purchase the new, more accurate transponder units it will
increase our fixed asset costs by $75,000, but we will be able to reduce our
tech support staff and there by save $32 per unit in variable costs.

The executive
committee replied that the proposition sounded interesting but they would need
an estimate of the increase in the number of programs that would be sold next
year and may have to do some price adjustments due to competition.

a.
Calculate the payback period for each project.
b.
Calculate the NPV of each project.
c.
Calculate the MIRR of each project.
d.
Which project(s) would you accept and why?
e. Calculate the expected MIRR of
the project.
f. Calculate the standard
deviation of the project.
g.
Calculate the coefficient of variation.
h. Calculate the expected MIRR of the new
portfolio with the new project
i.
Calculate, cost of debt, cost of preferred stock and cost common stock, and WACC

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