You are supporting the annual plan for a mid-sized capital-intensive retail and logistics business. Over the last 12 months, benchmark interest rates have risen sharply, and your CFO wants to know how that should change debt strategy and capital allocation for the next year. You have a mix of fixed- and floating-rate debt, a planned refinancing, and one large automation project under review. Assume taxes are 25% and evaluate the project on an after-tax cash flow basis.
| Metric | Value |
|---|---|
| Existing fixed-rate debt | $300,000,000 |
| Fixed interest rate | 4.0% |
| Existing floating-rate debt | $200,000,000 |
| Current floating interest rate | 6.5% |
| Floating rate last year | 3.5% |
| Debt maturing and to be refinanced this year | $150,000,000 |
| Old coupon on maturing debt | 3.0% |
| New refinancing rate | 7.0% |
| Annual EBITDA | $95,000,000 |
| Planned automation project upfront investment | $80,000,000 |
| Annual pre-tax operating savings from project | $18,000,000 |
| Project life | 7 years |
| Prior hurdle rate | 8.0% |
| New hurdle rate | 11.0% |
How do the higher interest rates change the company's financing strategy and investment decision? Quantify the impact on annual interest expense, interest coverage, and the automation project's NPV, and explain what you would recommend.