Simms Enterprises is attempting to evaluate the possibility of investing $85,000 in a machine having a 5-year life. The firm has estimated the cash inflows associated with the proposal as shown below. Simms has a capital structure containing 40% debt, 20% preferred stock, and 40% common stock. The firm’s outstanding bonds have an $80 annual coupon, a par-value of $1,000, 10 years left to maturity, and a current price of $1,250. The firm’s annual preferred stock dividend is $4.00 and their preferred shares are currently selling for $20. The firm’s common stock has a beta of 1.3. The risk-free rate is 3% and the required return on the market is 9%. The firm faces a tax rate of 40%.
CF1 $18,000 CF2 $22,500 CF3 $27,000 CF4 $31,500 CF5 $36,000
a. What is the firm’s wacc? b. What is the project’s payback? c. What is the project’s discounted payback? d. What is the projects net present value? e. What is the internal rate of return on this investment? f. What is the project’s modified internal rate of return? g. Should you accept this project? Why?