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FIN - Hippo Industries manufactures industrial machines

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Question;Hippo Industries manufactures industrial machines. Hippo is considering an expansion to add a new type of machine to its line. The expansion will require an initial investment of $150,000. The project will take 1 year to be put in place and begin operations. The project will have a life of 9 years after it beings, there will be a salvage value (continuation value) that will be realized in the year following the project ceasing to operate. Hippo's research estimates that the financial figures from undertaking the project will be those in the following chart:Year 0 1 2 3 4 5 6 7 8 9 10Revenues 100,000 100,000 100,000 102,000 104,040 107,161 110,376 114,791 119,383 Manufacturing Exp. (other than Depreciation) 35,000 35,700 36,414 37,506 38,632 40,177 41,784 43,873 46,067 Marketing Expenses 30,000 29,400 28,812 27,948 27,109 26,025 24,984 12,492 1,124 Depreciation 33,333 25,926 20,165 15,684 12,198 9,488 7,379 5,739 4,464 EBIT 1,667 8,974 14,609 20,862 26,101 31,471 36,229 52,687 67,728 Taxes at 30% 500 2,692 4,383 6,259 7,830 9,441 10,869 15,806 20,318 Net Income from the project 1,167 6,282 10,226 14,603 18,271 22,030 25,360 36,881 47,409Changes in net working capital 10,000 (10,000)Capital Expenditures 150,000 Continuation Value 15,624Hippo has a capital structure consisting of common stock and bond debt. Hippo's common stock consists of 50,000 shares outstanding with a current market price of $35 per share. The current dividend is $5 per year and is expected to grow at a rate of 5% per year Hippo's bond debt consists of $750,000 face value of bonds with a 6% coupon rate and a remaining life of 15 years. The bonds currently trade at a price of 100.0 Hippo's effective tax rate is 30%Hippo has determined that the risk of the new project is the same as the general risk of the firm itself. Hippo will use it's weighted average cost of capital as the discount rate for the projectYou are to calculate if the project is one which Hippo should undertake by calculating the NPV of the project Use the two tabs (Cost of Capital) and (NPV of the Project) to show your calculationsThen come back to this page and show whether you would recommend the project (i.e. type on the line below either, "I would recommend the project" or "I would not recommend the project

 

Paper#49637 | Written in 18-Jul-2015

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