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##### Higgs Boson, Inc. is considering a 5-year project.

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**Question**

Higgs Boson, Inc. is considering a 5-year project. The project requires an investment of $500 in;machinery at time t = 0, and it also needs to invest in working capital (WC). In fact, Higgs estimates;that its total WC requirement in year t1 equals 27% of the companys annual sales in year t. The;machinery will be depreciated straight-line from t = 1 to t = 5, with no salvage or scrap value.;The project is expected to generate annual sales of S1 = $10,000, S2 = $11,000, S3 = $13,000, S4;= $9,000, and S5 = $6,000. The cost of goods sold is 62% of sales. Administrative expenses are;24% of sales. The corporate tax rate is 30%.;Assume that Coutts bank is willing to give Higgs a 5-year constant amortization (CA) loan with;an annual interest rate of 12%, for any amount up to 90% of the projects total investment at t = 0.;(Recall that in a CA loan, the principal portion of the annual payment is the same each year.);Construct a SINGLE graph containing the NPV profiles corresponding to the following loan;scenarios: a) No loan, b) 25% loan, c) 50% loan, d) 75% loan. The graph containing these four;NPV profiles must occupy an entire page in landscape orientation, but leave some reasonable;margins (of course!). The horizontal scale of the graph must be from 0% to 70% (major increments;of 10% and minor increments of 5%, display only the major numerical values in the graph), and;the vertical scale must be from $0 to $5,000 (major increments of $1,000 and minor increments of;$500, display only the major numerical values in the graph). Verify that these four NPV profiles;cross at a unique specific discount rate, and state the exact numerical value of that crossing rate.;IMPORTANT: In addition to the graph, provide a table for each of the four debt scenarios (one;page per table, landscape orientation), detailing how you obtained the projects net cash flows. The;tables for scenarios a), b), and c) must include the corresponding amortization schedule.;NOTE: The NPV function in Excel is erroneous (sic!), but you can easily fix it. In particular, be;careful not to include the investment at t = 0 within the function. To illustrate, if the cash flows for;t = 0, t = 1,, t = 5 are I, C1,, C5, then to correctly find the NPV you must input the data as;follows: NPV(rate%, C1,, C5) I. If you input the data as NPV(rate%, I, C1,, C5) you will;get an incorrect NPV value! Hint: Verify that your NPV formula is correct by testing it on I =;100, C1 = +110, C2 = +121, C3 = +133.1, at r = 10%, which should give you NPV = +200.

Paper#23775 | Written in 18-Jul-2015

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