Blue Bottling, Inc. (BBI), is a bottling company and is considering expanding into filling 16-ounce bottles. In order to do so, BBI must purchase a new bottling machine. The machine would not replace the machine used to fill 32-ounce bottles. The risk of this project is similar to the current risk of the company. BBI uses Net Present Value as its investment decision method. Therefore, BBI executives have decided that their weighted average cost of capital would be an appropriate discount rate to use when analyzing the project.

About the Machine

BBI managers estimate the cost of the machine to be $260,000. In order for the machine to be usable for BBI, it must be modified, costing $40,000. The machine will be depreciated using straight-line depreciation, assuming a 7-year life and $30,500 salvage value. BBI managers believe that the machine will be replaced at the end of 7 years at which time it will be sold for its salvage value. During the 7 years of its use, managers estimate annual earnings before interest, depreciation and taxes (EBITDA) to be $60,000. There will be an increase in net working capital of $5000 with the new press, due to increased accounts receivable and inventory costs.

Weighted Average Cost of Capital

Current investigation shows that the firm has a 40% marginal tax rate. (Round all numbers to one-hundredth of one percent).

Debt

The firm has 7000 of its $1000 par, 18-year, 5% semi-annual bonds that are currently outstanding and being quoted at 104:8.

Common Stock

BBI common stock is currently trading for $50 per share and there are 100,000 shares issued and outstanding. There are two methods of computing the cost of capital, and you should average the two values for your final cost of common stock.

The firm will pay annual dividends of $3.00 per share in the coming year. The firm’s dividends and earnings have been growing at an annual rate of 3.5%, and this is expected to continue in the future. Lang’s beta is currently .8 and the current 90-day t-bill rate is 2.5%, while the historic market average is 10%.

Requirements of the Assignment

Using Excel, create a spreadsheet that calculates all relevant cash flows (i.e., initial investment, periodic cash flows, and terminal value). Note: The spreadsheet should have data at the top and the cash flow calculations completely in equations, or picking up numbers from a previous cell. The instructor should be able to change inputs. The spreadsheet automatically adjusts to those changes. Round all numbers to the nearest dollar.