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1 . The equipment has a delivered cost of $ 1 1 5 , 0 0 0 . An additional $ 3 , 0 0
The equipment has a delivered cost of $ An additional $ is required to install and test the new system. The new pumping system is classified by the IRS as year property with the same year estimated service life. For assets classified by the IRS as year property, the Modified Accelerated Cost Recovery System MACRS permits the company to depreciate the asset over years at the following rates: Year ; Year ; Year ; Year ; Year ; Year ; Year ; Year At the end of its estimated service life of years, the salvage value is expected to be $ with removal costs of $ The existing pumping system was purchased at $ five years ago and has been depreciated on a straightline basis over its economic life of years. If the existing system is removed from the well and crated for pickup, it can be sold for $ before tax. It will cost $ to remove the system and crate it At the time of replacement t the firm will need to increase its net working capital requirements by $ to support inventories. The new pumping system offers lower maintenance costs and frees personnel who would otherwise have to monitor the system. In addition, it reduces product wastage because of a higher cooling efficiency. In total, it is estimated that the yearly savings will amount to $ if the new pumping system is used. FPCs assets are financed by debt and common equity and has a target debt ratio of percent. Its debt carries an interest rate of percent. The firm has paid $ of dividend per share this year D and expects a constant dividend growth rate of percent per year in the coming years. The firms current stock price, P is $ The firm uses its overall weighted average cost of capital in evaluating average risk projects, and the replacement project is perceived to be of average risk. The firms federalplusstate tax rate is percent, and this rate is projected to remain fairly constant into the future. Compute the firms weighted average cost of capital given the infodata in the case. What other approachesmethods can be used to measure the firms cost of common equity and thus its WACC? To that end, what additional infodata would you need? Develop a capital budgeting schedule using the attached Cash Flow Estimation Worksheet Excel spreadsheet that should list all relevant cash flow items and amounts related to the replacement project over the year expected life of the new pumping system. Reference Reading: Cash Flow Analysis Example RIC Project one of required Readings for the course. pts Based on the capital budgeting schedule, evaluate the replacement project by computing NPV IRR, MIRR, and Payback Period. Would you recommend to accept or reject the replacement project based solely on your DCF analysis so far? pts Before you make the final acceptreject decision, what other factors and approaches would you consider further? Discuss also how to PRACTICALLY take into account those factors and approaches in the capital budgeting decision process, whenever applicable.
The equipment has a delivered cost of $ An additional $ is required to install
and test the new system.
The new pumping system is classified by the IRS as year property with the same year
estimated service life. For assets classified by the IRS as year property, the Modified
Accelerated Cost Recovery System MACRS permits the company to depreciate the
asset over years at the following rates: Year ; Year ; Year ; Year ; Year ; Year ; Year ; Year At the end of its estimated service life of years, the salvage value is expected to be $ with removal costs of $
The existing pumping system was purchased at $ five years ago and has been depreciated on a straightline basis over its economic life of years. If the existing system is removed from the well and crated for pickup, it can be sold for $ before tax. It will cost $ to remove the system and crate it
At the time of replacement t the firm will need to increase its net working capital requirements by $ to support inventories.
The new pumping system offers lower maintenance costs and frees personnel who would otherwise have to monitor the system. In addition, it reduces product wastage because of a higher cooling efficiency. In total, it is estimated that the yearly savings will amount to $ if the new pumping system is used.
FPCs assets are financed by debt and common equity and has a target debt ratio of percent. Its debt carries an interest rate of percent. The firm has paid $ of dividend per share this year D and expects a constant dividend growth rate of percent per year in the coming years. The firms current stock price, P is $ The firm uses its overall weighted average cost of capital in evaluating average risk projects, and the replacement project is perceived to be of average risk.
The firms federalplusstate tax rate is percent, and this rate is projected to remain fairly constant into the future.
Compute the firms weighted average cost of capital given the infodata in the case.
What other approachesmethods can be used to measure the firms cost of common equity and thus its WACC? To that end, what additional infodata would you need?
Develop a capital budgeting schedule using the attached Cash Flow Estimation Worksheet Excel spreadsheet that should list all relevant cash flow items and
amounts related to the replacement project over the year expected life of the new pumping system. Reference Reading: Cash Flow Analysis Example RIC Project one of required Readings for the course.
pts Based on the capital budgeting schedule, evaluate the replacement project by
computing NPV IRR, MIRR, and Payback Period. Would you recommend to accept or reject the replacement project based solely on your DCF analysis so far?
pts Before you make the final acceptreject decision, what other factors and approaches would you consider further? Discuss also how to PRACTICALLY take into account those factors and approaches in the capital budgeting decision process, whenever applicable.
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