FIN – ABC Manufacturing is considering an investment

| June 6, 2016

Question
ABC Manufacturing is considering an investment in a new product line. The product line will require a significant investment in robotic technology for $150 million dollars. The company’s projected Revenue for next year is $110 million dollars and COGS is $80 million dollars. The investment is expected to increase Revenue by 2.5% and reduce COGS by 5.0% each year for years 2 through 5.
The following information is relevant to our Capital Budgeting analysis:
• ABC Debt – $35 million dollars
• ABC Equity – $100 million dollars
• Current YTM on Debt – 11.5%
• Current Beta – 1.8
• US Treasury Bill Rate – 3.2%
• S&P 500 Index Fund Return – 7.8%
• ABC Tax Rate – 35%
• Straight Line Depreciation is appropriate for this investment
The CEO has requested a cash flow analysis for this project over a 5 year horizon. In addition, the executive team has requested IRR and NPV calculations to assist in deciding the viability of this project.

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