Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information
about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
a. Calculate to the following for Pharmos considering its tax rate of 25 percent.
i. Total Market Value for the Firm
ii. After-tax cost of Loan
iii. After-tax cost of Bonds
iv. Cost of Equity
v. Cost of Preferred Stock
vi. Weighted Average Cost of Capital (WACC)
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
– The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
– The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
– There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
a. Determine the initial outlay of the project.
b. Calculate the annual after-tax operating cash flow for Years 1 -5.
c. Determine the terminal year non-operating cash flow in year 5:
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
a. Determine the initial outlay of the project.
b. Calculate the annual after-tax operating cash flow for Years 1 -5.
c. Determine the terminal year non-operating cash flow in year 5:
d. Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.
e. What is the estimated Internal Rate of Return (IRR) of the project?
f. Should the project be accepted based on the IRR?
g. Calculate to the following for Pharmos considering its tax rate of 25 percent.
i. Total Market Value for the Firm
ii. After-tax cost of Loan
iii. After-tax cost of Bonds
iv. Cost of Equity
v. Cost of Preferred Stock
vi. Weighted Average Cost of Capital (WACC)
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit, EACH YEAR in contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Calculate the following considering its tax rate of 25 percent
1. Total Market Value for the Firm
2. After-tax cost of Loan
3. After-tax cost of Bonds
SHOW ALL WORKING, NO EXCEL
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit, EACH YEAR in contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
1. Determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.
2. What is the estimated Internal Rate of Return (IRR) of the project?
3. Should the project be accepted based on the IRR?
SHOW ALL WORKING, NO EXCEL
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at
the end of the project. Other than the equipment, the company needs to increase its cash and
cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts
receivable by $250,000 and increase account payable by $50,000 at the beginning of the project.
Pharmos Incorporated expect the project to have a life of five years. The company would have to
pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects
a positive impact on the demand for the new product line. Expected annual sales for the ECG
machines in the first three years are $1,200,000 and $850,000 in the following two years. The
variable costs of production are projected to be $267,000 per year in years one to three and
$375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000
in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines
produced by the company. By investing in the new product line Pharmos Incorporated would
have to use a packaging machine which the company already has and will be sold at the end of
the project for $350,000 after-tax in the equipment market.
1) The company’s financial analyst has advised Pharmos Incorporated to use the weighted average
cost of capital as the appropriate discount rate to evaluate the project. The following information
about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and
the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond
issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were
sold at par, and incurred floatation cost of 2 percent per issue.
2) The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for
$60, and there are 100,000 shares outstanding.
3) There are 300,000 shares of common stock outstanding, and they are currently selling for $21
each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to
be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside
the Financial Controller of the company to help determine whether the company should invest in the new
product line. He has provided you with the following questions to guide you in your assessment of the
project and to present your findings to the Company.
a. Determine the initial outlay of the project.
b. Calculate the annual after-tax operating cash flow for Years 1 -5.
3. Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
is considering a project proposal which requires an initial investment
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
Determine the initial outlay of the project.
Calculate the annual after-tax operating cash flow for Years 1 -5.
Determine the terminal year non-operating cash flow in year 5:
Taking into consideration all the information given, determine the Net Present Value of the
project and advice the company on whether to invest in the new line of product.
What is the estimated Internal Rate of Return (IRR) of the project?
Should the project be accepted based on the IRR?
Calculate to the following for Pharmos considering its tax rate of 25 percent.
i. Total Market Value for the Firm
After-tax cost of Loan
After-tax cost of Bonds
Cost of Equity
Cost of Preferred Stock
Weighted Average Cost of Capital (WACC)
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and
$375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
$60, and there are 100,000 shares outstanding.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required:
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at
the end of the project. Other than the equipment, the company needs to increase its cash and
cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts
receivable by $250,000 and increase account payable by $50,000 at the beginning of the project.
Pharmos Incorporated expect the project to have a life of five years. The company would have to
pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects
a positive impact on the demand for the new product line. Expected annual sales for the ECG
machines in the first three years are $1,200,000 and $850,000 in the following two years. The
variable costs of production are projected to be $267,000 per year in years one to three and
$375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
Year Project A ($) Project B ($) Project C ($)
0 (Investment) -1,000 -$10,000 -$5,000
1 600 4,000 2,000
2 300 3,000 1,000
3 200 2,000 2,000
4 100 2,000 1,000
5 500 4,000 2,000
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000
each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester
machines produced by the company. By investing in the new product line Pharmos Incorporated
would have to use a packaging machine which the company already has and will be sold at the
end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average
cost of capital as the appropriate discount rate to evaluate the project. The following information
about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and
the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond
issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were
sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for
$60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21
each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to
be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside
the Financial Controller of the company to help determine whether the company should invest in the new
product line. He has provided you with the following questions to guide you in your assessment of the
project and to present your findings to the Company.
Required: Answer the following questions given the information above
e. What is the estimated Internal Rate of Return (IRR) of the project?
f. Should the project be accepted based on the IRR?
g. Calculate to the following for Pharmos considering its tax rate of 25 percent.
i. Total Market Value for the Firm
ii. After-tax cost of Loan
iii. After-tax cost of Bonds
iv. Cost of Equity
v. Cost of Preferred Stock
vi. Weighted Average Cost of Capital (WACC)
3. Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at
the end of the project. Other than the equipment, the company needs to increase its cash and
cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts
receivable by $250,000 and increase account payable by $50,000 at the beginning of the project.
Pharmos Incorporated expect the project to have a life of five years. The company would have to
pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects
a positive impact on the demand for the new product line. Expected annual sales for the ECG
machines in the first three years are $1,200,000 and $850,000 in the following two years. The
variable costs of production are projected to be $267,000 per year in years one to three and
$375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
Year Project A ($) Project B ($) Project C ($)
0 (Investment) -1,000 -$10,000 -$5,000
1 600 4,000 2,000
2 300 3,000 1,000
3 200 2,000 2,000
4 100 2,000 1,000
5 500 4,000 2,000
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000
each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester
machines produced by the company. By investing in the new product line Pharmos Incorporated
would have to use a packaging machine which the company already has and will be sold at the
end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average
cost of capital as the appropriate discount rate to evaluate the project. The following information
about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and
the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond
issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were
sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for
$60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21
each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to
be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside
the Financial Controller of the company to help determine whether the company should invest in the new
product line. He has provided you with the following questions to guide you in your assessment of the
project and to present your findings to the Company.
Required: Answer the following questions given the information above
b. Calculate the annual after-tax operating cash flow for Years 1 -5.
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.
What is the estimated Internal Rate of Return (IRR) of the project?
Should the project be accepted based on the IRR?
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new
production line of portable electrocardiogram (ECG) machines for its clients who suffer from
cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls
within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at
the end of the project. Other than the equipment, the company needs to increase its cash and
cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts
receivable by $250,000 and increase account payable by $50,000 at the beginning of the project.
Pharmos Incorporated expect the project to have a life of five years. The company would have to
pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects
a positive impact on the demand for the new product line. Expected annual sales for the ECG
machines in the first three years are $1,200,000 and $850,000 in the following two years. The
variable costs of production are projected to be $267,000 per year in years one to three and
$375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
Year Project A ($) Project B ($) Project C ($)
0 (Investment) -1,000 -$10,000 -$5,000
1 600 4,000 2,000
2 300 3,000 1,000
3 200 2,000 2,000
4 100 2,000 1,000
5 500 4,000 2,000
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000
each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester
machines produced by the company. By investing in the new product line Pharmos Incorporated
would have to use a packaging machine which the company already has and will be sold at the
end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average
cost of capital as the appropriate discount rate to evaluate the project. The following information
about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and
the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond
issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were
sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for
$60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21
each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to
be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside
the Financial Controller of the company to help determine whether the company should invest in the new
product line. He has provided you with the following questions to guide you in your assessment of the
project and to present your findings to the Company.
Required: Answer the following questions given the information above
c. Determine the terminal year non-operating cash flow in year 5:
d. Taking into consideration all the information given, determine the Net Present Value of the
project and advice the company on whether to invest in the new line of product.
e. What is the estimated Internal Rate of Return (IRR) of the project?
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of a university, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
– The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
– The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
– There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated
has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
a. Determine the initial outlay of the project.
b. Calculate the annual after-tax operating cash flow for Years 1 -5.
c. Determine the terminal year non-operating cash flow in year 5:
d. Taking into consideration all the information given, determine the Net Present Value of the project and advice the company on whether to invest in the new line of product.
e. What is the estimated Internal Rate of Return (IRR) of the project?
f. Should the project be accepted based on the IRR?
g. Calculate to the following for Pharmos considering its tax rate of 25 percent
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
is considering a project proposal which requires an initial investment
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Determine the initial outlay of the project.
Calculate the annual after-tax operating cash flow for Years 1 -5.
Determine the terminal year non-operating cash flow in year 5.
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit, EACH YEAR in contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
NO EXCEL SPREADSHEETS
SHOW FULL WORKINGS WITHOUT EXCEL
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
Calculate to the following for Pharmos considering its tax rate of 25 percent.
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of a university, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Required: Answer the following questions given the information above
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Calculate to the following for Pharmos considering its tax rate of 25 percent.
Pharmos Incorporated is a Pharmaceutical Company which is considering investing in a new production line of portable electrocardiogram (ECG) machines for its clients who suffer from cardio vascular diseases. The company has to invest in equipment which cost $2,500,000 and falls within a MARCS depreciation of 5-years, and is expected to have a scrape value of $200,000 at the end of the project. Other than the equipment, the company needs to increase its cash and cash equivalents by $100,000, increase the level of inventory by $30,000, increase accounts receivable by $250,000 and increase account payable by $50,000 at the beginning of the project. Pharmos Incorporated expect the project to have a life of five years. The company would have to pay for transportation and installation of the equipment which has an invoice price of $450,000.
The company has already invested $75,000 in Research and Development and therefore expects a positive impact on the demand for the new product line. Expected annual sales for the ECG machines in the first three years are $1,200,000 and $850,000 in the following two years. The variable costs of production are projected to be $267,000 per year in years one to three and $375,000 in years four and five. Fixed overhead is $180,000 per year over the life of the project.
The introduction of the new line of portable ECG machines will cause a net decrease of $50,000 each year in profit contribution after taxes, due to a decrease in sales of the other lines of tester machines produced by the company. By investing in the new product line Pharmos Incorporated would have to use a packaging machine which the company already has and will be sold at the end of the project for $350,000 after-tax in the equipment market.
The company’s financial analyst has advised Pharmos Incorporated to use the weighted average cost of capital as the appropriate discount rate to evaluate the project. The following information about the company’s sources of financing is provided below:
The company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. Pharmos Incorporated has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually and matures in 10 years. The bonds were sold at par, and incurred floatation cost of 2 percent per issue.
The company’s preferred stock pays an annual dividend of 4.5 percent and is currently selling for $60, and there are 100,000 shares outstanding.
There are 300,000 shares of common stock outstanding, and they are currently selling for $21 each. The beta on these shares is 0.95.
Other relevant information about the company follows:
The 20-year Treasury Bond rate is currently 4.5 percent and you have estimated market-risk premium to be 6.75 percent using the returns on stocks and Treasury bonds from 2010 to 2019. Pharmos Incorporated has a marginal tax rate of 25 percent.
As a recent graduate of the UWIOC, The General Manager of the company has hired you to work alongside the Financial Controller of the company to help determine whether the company should invest in the new product line. He has provided you with the following questions to guide you in your assessment of the project and to present your findings to the Company.
Calculate to the following for Pharmos considering its tax rate of 25 percent.
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