You have estimated that the initial revenues will be $100 million per year and grow at a rate of 45% per year for four years. Due to political risk, you decide to use only a four-year horizon for planning purposes. Variable costs are expected to be 70% of sales; fixed costs are projected to be $10 million per year. Initial cost of machinery, land, equipment, and other things amounts to $110 million. This $110 million will be depreciated straight-line to zero over a seven-year accounting life. However, the expected market value of the fixed assets at the end of four years is $50 million. Net working capital requirements are minimal, just $10 million at the beginning of the project, all of which will be recovered at termination. Tax rate of your company is 30%. This project will be financed with both debt and equity. The plan is to mirror the firm’s target capital structure by issuing 15 million shares of stock priced at $10.00 a share and $170 million face value of 10-year bonds which will be priced at 94% of par if a coupon of 7% is offered to investors. The company will pay dividends of $3.60 per year (starting in one year) and increase the dividend by 4% per year indefinitely. Treasury bills offer 1% return and the expected market returns are 11% per year. The stock’s beta is 1.8. Create an Excel template where all the necessary calculations are made. • What are the cash-flows each year from this project? • What is the WACC? • What is the total initial cost of the project?

You have estimated that the initial revenues will be $100
million per year and grow at a rate of 45% per year for four years. Due to political risk,
you decide to use only a four-year horizon for planning purposes. Variable costs are
expected to be 70% of sales; fixed costs are projected to be $10 million per year. Initial
cost of machinery, land, equipment, and other things amounts to $110 million. This $110
million will be depreciated straight-line to zero over a seven-year accounting life.
However, the expected market value of the fixed assets at the end of four years is $50
million. Net working capital requirements are minimal, just $10 million at the beginning
of the project, all of which will be recovered at termination. Tax rate of your company is
30%. This project will be financed with both debt and equity. The plan is to mirror the
firm’s target capital structure by issuing 15 million shares of stock priced at $10.00 a share
and $170 million face value of 10-year bonds which will be priced at 94% of par if a coupon
of 7% is offered to investors. The company will pay dividends of $3.60 per year (starting
in one year) and increase the dividend by 4% per year indefinitely. Treasury bills offer 1%
return and the expected market returns are 11% per year. The stock’s beta is 1.8.
Create an Excel template where all the necessary calculations are made.
• What are the cash-flows each year from this project?
• What is the WACC?
• What is the total initial cost of the project?