finance-The current assembler will last another 4 years

The current assembler will last another 4 years; however, the new machine could generate more revenues. The new assembler would generate revenues of $1,250,000/year and because of new technology the cash expenses will only be $525,000/yr. The current machine can produce $725,000 in revenue per year and only has cash expenses of $425,000. It would cost $200,000 to ship a new machine to the plant and there would also be an additional installation cost of $72,000 for an updated electrical service. The new machine will cost Sniff-it-Out $923,000. The new machine will have a service life of 4 years. The company will depreciate the machine on a straight line basis and at the end of 4 years it will have a cash value of $50,000 and a book value of 0. The book value on the current machine is $50,000, today. It will be depreciated down to 0 over the next 4 years, also using straight line depreciation. The current machine could be sold for $125,000, today and at the end of another 4 years it could be sold for $30,000. Tomas (currently the CFO) noted that the new machine would need an additional $60,000 in inventory if it were purchased. The partners agreed that purchasing the new machine might be a good idea; however, they all agreed that the decision hinged on two items, more analysis and proper financing. The company can obtain financing for this project at 11 % from the local bank. The 11% cost does not take into effect the company’s current tax rate of 28%.

In early 2002 Sniff-it-Out went public. It was decided at that time that 20 % of the company’s stock should be issued as tracker stock (tracker stock helps banks, employees and other with a vested interest to value the company).

Annotated Financial Information

Year Earnings Dividends Year-end

Per Share Per Share Stock Price

2002 1.05 .32 11.25

2003 1.15 .33 12.40

2004 1.30 .38 13.70

2005 1.55 .46 15.10

2006 1.58 .48 16.35

2007 1.65 .50 17.33

2008* 1.76 .61 19.38

*2008 figures are an estimate.

Tomas also noted that the theft recovery division is estimated to increase at a 13% growth rate for the next 2 years in spite of the economic slowdown that is occurring in other business sectors of the country. “This is reflects our best corporate estimates. Now that the military is interested in our product, we have opened an entirely new market for surveillance devices. Hopefully the economy will continue to grow at the same pace as last year and the bad times are behind us” said Tomas as he was looking over the latest financials.

A local security analyst with Norris and Company estimated that the stock has a beta of 1.85 and is considered a strong buy. The markets that have an over all expected market return of 9.25%.

Balance Sheet 2008 (000’s)

Cash 230 Current Liab 580

Acc’t Rece 310 Bonds 5,000

Inventory 875 Preferred Stock 1,000

Total Current Assets 1,415 Common Stock 300

Plant and Equipment 9,040 Ret Earnings 3,575

Total Assets 10,455 Total Liab& Eq. 10,455

Current Market Data

Bonds Preferred Stock Common Stock

Price $1147.20 $110.00 $19.35

1) There are 300,000 share of common stock issued and outstanding.

2) The bonds have an 8% annual coupon and are due December 31, 2020.

3) Par value for the common stock is $1.00.

4) Par Value for the preferred stock is $100.00.

5) Preferred stock pays a 6% dividend on an annual basis.

6) Government T-Bonds are currently paying 5%.

New GPS Transponders

Sniff-it-Out can purchase a new, more accurate GPS transponder to enhance the location accuracy. The new transponder will give the company an accuracy that is currently only available with conventional aerial surveillance equipment. Jerry Jones, the head of the computer mapping software department, prepared the following information and forwarded it in a memo for the executive team.

________________________________________________________________________

MEMO

September 23

The theft recovery unit is currently selling at $700 (wholesale, to the dealers). The fixed cost on the receiver equipment is $400,000. The total variable costs on the software last year was $2,873,000 due to GPS adjustments for different locations. Last year 6500 units were sold.

I estimate that if we purchase the new, more accurate transponder units it will increase our fixed asset costs by $75,000, but we will be able to reduce our tech support staff and there by save $32 per unit in variable costs.

The executive committee replied that the proposition sounded interesting but they would need an estimate of the increase in the number of programs that would be sold next year and may have to do some price adjustments due to competition.

a. Calculate the payback period for each project.

b. Calculate the NPV of each project.

c. Calculate the MIRR of each project.

d. Which project(s) would you accept and why?

e. Calculate the expected MIRR of the project.

f. Calculate the standard deviation of the project.

g. Calculate the coefficient of variation.

h. Calculate the expected MIRR of the new portfolio with the new project

i. Calculate, cost of debt, cost of preferred stock and cost common stock, and WACC