B.E. Kemper, LLC (KEMPER) is a custom parts fabricator supporting the classic auto and recreational marine industries. The company is evaluating a proposal by its Marketing department to develop one-of-a-kind, customize parts for resto-mod professionals and the hobbyist in their desire for that special, unique "new" old car/truck. This approach will require the expertise of design artists and engineers working with the restorer and the need for custom programs, computer-aided design, CNC milling equipment, and both polymer & metal 3D printing equipment Market studies indicate that the restoration market is continuing to grow and is broadening to include the newer 'classic' vehicles of the '80s and '90s. The industry consists of both professional restoration shops and many talented hobbyists. The anticipated demand is incorporated in the forecasts below. • Sales Forecast: The estimate of sales revenues for this project is $1,250,000 in year 1. Sales growth of 50% is forecast for year 2, 30% for year 3, then the growth rate settles to 10% each year for years 4, 5 and 6. Sales are then stable with a growth rate of 0% (equal to year 6) in years 7 and 8. Finally, sales are expected to decline by 10% in year 9. • Production cost forecasts are: o ● ● ● • If the company goes ahead with the proposed product, it will affect the company's net operating working capital. At the outset, t = 0, inventory will increase by $265,000. Accounts receivable will increase by $125,000, and accounts payable will increase by $245,000. Fixed costs: $455,000 per year (a large portion of this cost is labor for the designer and engineer). o Annual variable costs: 46% of sales revenue. ● The company will have to purchase new equipment, mentioned above, to produce the new product. The equipment, including shipping and installation, is expected to cost (t=0) $5,325,000. ● The equipment falls into the IRS 10-year class life using the MACRS depreciation method with the ½ year convention. (See MACRS table). • Current Capital Structure KEMPER has the following levels of debt and common equity (market values): o Debt: $4,894,300 o Equity: $7.021,700 o Total Capital: $11,916,000 The company has a marginal (federal + state) tax rate (T) of 31%, and uses MACRS depreciation. The net operating working capital will be liquidated after the project is completed. The program (project) is planned to continue for 9 years. At the end of the project, the equipment will be salvaged (sold). The forecasts predict that the equipment can be sold then for $225,500. MACRS (half-year convention incorporated) Depreciation (% of depreciable basis) Year of Operation 1 2 3 4 5 6 7 8 9 10 11 Class-life 10- 3-Year 5-Year 7-Year Year 33.33% 20.00% 14.29% 10.00% 44.45% 32.00% 24.49% 18.00% 14.81% 19.20% 17.49% 14.40% 7.41% 11.52% 12.49% 11.52% 11.52% 8.93% 9.22% 5.76% Your analysts compiled current market information: Market risk premium (rm-r): 4.25% 1.14% o o Risk-free rate (r): The company's beta (at its current capital structure) is: 1.34 8.92% 7.37% 8.93% 6.55% 4.46% 6.55% 6.56% 6.55% 3.28%