Cost of Capital

Cost of Capital

Student’s name

Affiliation

Course

Date

investment outlay of $30 million, consisting of $25 million for equipment and $5 million for net working capital (NWC) (plastic substrate and ink inventory); NWC recoverable in terminal year

Project and equipment life: 5 years

Sales: $25 million per year for five years

Assume gross margin of 60% (exclusive of depreciation)

Depreciation: Straight-line for tax purposes

Selling, general, and administrative expenses: 10% of sales

Tax rate: 35%

Initial investment-30 million

Equipment =25 million

Net working Capital =5million

Sales =25 million

Gross margin 60%

S&G&A=10% Sales=(10/100*25 million)=2.5 million

Initial Outlay

Equipment + Net Working Capital

=25 million + 5 million

CFt = (revenues – costs) *(1 – tax rate)

Revenues= 25 million

Costs=2.5 million

Tax rate =35%

Operating Cashflow

1st YEAR= (25 million-2.5 million) *(1-0.35)

=22.5 million * (0.65)

=14.625 million

2nd YEAR= (25 million-2.5 million) *(1-0.35)

=22.5 million * (0.65)

=14.625 million

3rd YEAR= (25 million-2.5 million) *(1-0.35)

=22.5 million * (0.65)

=14.625 million

4th YEAR= (25 million-2.5 million) *(1-0.35)

=22.5 million * (0.65)

=14.625 million

5th YEAR= (25 million-2.5 million) *(1-0.35)

=22.5 million * (0.65)

=14.625 million

Where: A = P (1 + rt) =

r = (1/5) ((39625000/25000000) – 1) = 0.117r = 0.117

r=11.7%