HW5 Firm Valuation Homework

Materials to be submitted: Submit a printout as well as an electronic copy of the Excel

spreadsheet. The electronic copies should be named in the following manner:
H5_Session#_Group#_lastname1_lastname2_lastname3 and emailed to:
vikrant.vikrant@rutgers.edu
Grading Policy: The homework will be graded out of 4. Failure to turn in homework, or
homework turned in late will automatically receive 0.
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Pistachio, Inc. is thinking of building a bakery to introduce French cookies, so-called
macarons, to the Newark market. A preliminary marketing study, which cost $75,000 and
which was completed last year, showed a significant demand for macarons in the Newark
area. The bakery is expected to last for 25 years. Its initial cost is $220,000. This cost can
be depreciated over 15 years using straight line depreciation. The salvage value of the
equipment in the bakery after 15 years is $20,000. After 15 years the bakery can be
renovated. The cost of renovation will be $80,000 and can be depreciated (again using
straight line depreciation) over the remaining 10 years of the bakerys life. The salvage
value of the equipment after the remaining 10 years will be $10,000. The land the bakery
is built on could be rented out for $12,500 a year for 25 years.
The bakery will be able to produce 75,000 macarons a year. The price of a macaron is
currently $1.55. It is expected to grow at a rate of 5% per year for the first 2 years, then at
2% per year for 6 years and finally stays the same thereafter for the remainder of the
bakerys life. Pistachio, Inc. expects to be able to sell all the macarons that it can produce.
The basic ingredients for a macaron currently (t = 0) cost $0.25. These costs are expected
to grow by 1% through the lifetime of the project. The labor required to operate the
bakery is expected to cost a total of $45,000 dollars in t = 1 and this is expected to
increase at 4% thereafter. There is no working capital requirement.
The firms total tax rate including local taxes is 36 percent. Pistachio, Inc. expects to
make substantial profits on its other products so that it can offset any losses on the bakery
for tax purposes.
Questions
1. Construct a spreadsheet in EXCEL to find annual cash flows of the macarons
project. All cash flows occur at year's end.
2. Currently, the firms market cap is $800 million. Its equity beta is 1.25. It also has
200 million debt outstanding. The total amount of interest paid on its debt each
year is 5 million. The risk-free rate is 5% and market-risk premium is 8%. Whats
the weighted average cost of capital for the firm?
3. Whats the NPV of the project?