How Would I Calculate The Following Accounting Problem (part 4)?

A Company bought land 2 years ago for $1,500,000. It plans to build its new plant which costs $4,000,000. The legal fee for purchase was $120,000. The company uses a Capital Cost Allowance rate of 8% for the amortizing of plant, which can be scrapped for $780,000 at end of project.
Research was conducted before land was bought costing $70,000. A valuation shows that the land is now worth $3,000,000 because a residential housing facility has been earmarked in the same town of proposed plant site. This new residential area is projected to increase the firm’s future cash flows by 15% in the first two years and 20 percent in years 3 to 5. The project will last for five yrs.
Equipment used in production of the systems will cost the company $800,000 and they shall be amortized at a Capital Cost Allowance rate of 14%.Salvage value of equipment at the end of project will be $120,000.
The company’s current market information on its securities-
-Debt- Currently selling for 94% of par, and pays semi-annual interest. 28,000 8 percent coupon bonds are outstanding with 10 years to maturity; Yield to Maturity is 8.92 %.
-Common Stock- Selling for $60.00 per share and has a beta of 1.4. Outstanding amount 350,000.
-Preferred Stock-22,000 shares, 5% preferred outstanding and is selling for $70 per share.
-Market- Risk Premium 8% and treasury bills trade at 6%.
The broker for company recommends it issues new shares of common stock to raise funds to start business, instead of using retained earnings.
The company would need $400,000 cash to set up operations. Presently, the tax rate for the company is 25%. It has been decided that it will raise all equity for new projects using external funding.
Other relevant information:
a. The company will incur $400,000 annual fixed costs,
b. The plant will produce 800 systems per year and sold for $3,000 per system.
c. The annual variable costs are $1,200 per unit.
DETERMINE:
*****The appropriate discount rate to evaluate the project.

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One Response to “How Would I Calculate The Following Accounting Problem (part 4)?”

  1. Go with the flow says:

    If there are 50 parts to this let us know

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