Problem:

Burly Owl Inc. is going to purchase a new machine that will cost $200,000. The machine has a useful life of 4years and falls into the 3-year property class for the depreciation purposes. The IRS MACRS schedule for the four years is 1)33.33% 2)44.44% 3)14.82% 4)7.41% .It will generate $70,000 per year of savings for Burly and has not salvage value. Burly's corporate tax rate is 40%. In addition, Butly has 3000 outstanding 9% annual coupon bonds with a $1,000 par value, 15years to maturity and a price of $1085. Butly also has 100,000 shares of common stocks outstanding that is selling for $45 per share. This stock has a beta of 1.65, the expected market return is 12% and the risk-free rate is 5%. Finally, Burly has 26,000 shares of preferred stock outstanding that pays a $6.5 dividend and sells for $40 per share.

Required:

Question 1: What is the operating cash flow for the machine for years 1-4?

Question 2: What is the after-tax cost of debt for burly?

Question 3: What is the cost of equity capital?

Question 4: What is the cost of preferred capital?

Question 5: What is Burly's WACC

Question 6: The NPV of Burly's project is?

Note: Show all workings.