24 Jul WHAT WOULD HAPPEN TO STOCKHOLDERS WEALTH IF YOU DECIDE TO ADOPT THIS PROJECT?
As operations manager of Widgets International Inc. you are considering building a new plant in Red Show more As operations manager of Widgets International Inc. you are considering building a new plant in Redwood TX. At the expected production level of 300000 widgets per year the unit cash cost of production is projected to be $30 and you believe you can sell the widgets for $40 each. The Building will cost $6000000 and will be depreciated (by the straight line method) over 25 years to its scheduled scrap value (book value) of $50000. You expect to be able to sell the building for $200000 after 25 years. The Corporate Tax Rate is 32% on both ordinary income and capital gains. The (after tax) Cost of Capital is 12%. (a) Draw a time line showing the projects incremental cash flow today (t = 0) next year (t = 1) and for the end of the project (t = 25). (b) What is the NPV of this project? Show all work (c) If you finance this with perpetual debt at 3% interest per year what would be the present value of the interest tax shield? (d) What would happen to stockholders wealth if you decide to adopt this project? (Direction and amount). Show less
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