4 5. 0 " 0 The Wilson Company has an opportunity to invest in one of two new projects. They are mutually exclusive. Project A requires a $300,000 investment for the new machinery with a 5-year life and no salvage value. Project B requires a $45,000 investment with a $5,000 salvage value -- also with a 5-year life. The two projects yield the following predicted annual future results. The company uses straight-line depreciation, and cash flows occur evenly throughout the year. Wilson Company has the following Weighted Average Cost of Capital (WACC) information: 2 Capital Capital Pre-Tax Cost of Applicable After-Tax 3 Description Structure % Capital Tax Rate Cost of Capital Weighted Ave. Cost of Capital 4 5 Debt 6 Stock T Total $100,000 200,000 $300,000 100.00% 33.33% 13.00% 66.67% 17.96% 30.00% 0 9.10% 3.03% 17.96% 11.97% 15.00% 9 O 2 These projects are judged to have a "normal" amount of risk, and for such projects, the company uses the WACC as the discount rate. The applicable tax rate is 30%. The pre-tax cost of capital for debt is 13.00 %, and the pre-tax cost of equity is 17.96%. Round the WACC to one decimal point.s (i.e., 10.0%). 24 Project A 25 26 Sales Expenses: Direct Materials x | J = Year 1 Year 2 $359,523 $359,523 Year 3 $359,523 Year 4 Year 5 $359,523 $1,430,952 35,952 35,952 35,952 35,952 143,095 Hi The J 28 Direct Labor 107,857 107,857 107,857 107,857 429,286 29 Overhead (Including Depreciation) 200,000 200,000 200,000 200,000 200,000 30 Selling and Administrative Expense 30,000 30,000 30,000 30,000 30,000 31 Total Expenses 373,809 373,809 373,809 373,809 802,381 32 30 Pretax Income (14,286) (14,286) (14,286) (14,286) 628,571 3 Income Taxes (30%) 35 Net Income (4,286) (4,286) ($10,000) ($10,000) (4,286) ($10,000) (4.286) ($10,000) 188,571 $440,000 S 37 Project B 38 Sales Year 1 $170,239 Year 2 $170,239 Year 3 $170,239 Year 4 $170,239 Year 5 $170,239 29 Expenses: 40 Direct Materials 17,024 17,024 17,024 17,024 17,024 41 Direct Labor 51,072 51,072 51,072 51,072 51,072 42 Overhead (Including Depreciation) 75,000 75,000 75,000 75,000 75,000 43 44 Selling and Administrative Expense 10,000 10,000 10,000 10,000 10,000 Total Expenses 153,096 153,096 153,096 153,096 153,096 45 46 Pretax Income 17.143 17,143 17,143 17,143 17.143 47 Income Taxes (30%) 48 Net Income 5,143 $12,000 5,143) $12,000 5,143 5,143) 5,143 $12,000 $12.000 $12,000 45 50 51 52 53 Whichever project you choose, if any, you require a minimum return of the WACC percent return on your investment. You may elect to use "Steve's Way" or the "Book Way". You may not use Excel functions (ie., NPV or =IRR). Show your work. Where templates have been provided, enter your solutions into the red outlined boxes below. 54 Required: 56 1. Calculate the Weighted Average Cost of Capital for these projects in the designed area above. 56 2. Compute each project's expected net cash flows. (Round the net cash flows to the nearest dollar.) fx 1 Hi The 1 . 3 Required: C D 1. Calculate the Weighted Average Cost of Capital for these projects in the designed area above. 2. Compute each project's expected net cash flows, (Round the net cash flows to the nearest dollar.) 3. Determine each project's net present value (NPV). Assume that cash flows occur at each year-end using the WACC as the discount rate. A template for "Steve's Way" is provided below for each project's NPV calculation. Year Factor Project A Cash Flow Present Value Net Present Value Profitability Index Year Factor Project B Cash Flow Present Value Profitability Index Net Present Value D 4. Which Project would you choose using the Net Present Value criterion? 5. Determine each neiect's Internal Rate of Return (IRR) Assume that cash flows necur at aach year and using the x 1 5 Hi The B I UG A O 1 T D E BB 0 4. Which Project would you choose using the Net Present Value criterion? 5. Determine each project's Internal Rate of Return (IRR). Assume that cash flows occur at each year-end using the WACC as the discount rate. A template for "Steve's Way" is provided below for each project's IRR calculation. Year Factor Project A Cash Flow Present Value Net Present Value Year Factor Project B Cash Flow Present Value Net Present Value 6. Which Project would you choose using the Internal Rate of Return criterion? 7. Which Project would you choose considering both the NPV and the IRR criterion? 8. Determine each project's (simple) payback period. (Round the payback period to two decimals.) = I+ H Hi The 106 06 107 100 110 312 113 314 115 B I UG A B T = 9. EB F Q H 7. Which Project would you choose considering both the NPV and the IRR criterion? 8. Determine each project's (simple) payback period. (Round the payback period to two decimals.) A template has been provided below for calculating the (simple) payback period. Year Factor Project A Cash Flow Present Value Cumulative Cash Flow Payback 116 117 Net Present Value 158 119 120 121 122 Year Factor Project B Cash Flow Present Value Cumulative Cash Flow Payback 123 124 125 126 127 126 Net Present Value 129 9. Determine each project's Break Even Time (BET) (Round the payback period to two decimals.) 130 131 fx 1 A template has been provided below for calculating the Break Even Time (BET). = 5 Hi The B I US A 1 1- T FA C D E F 10 9. Determine each project's Break Even Time (BET) (Round the payback period to two decimals.) A template has been provided below for calculating the Break Even Time (BET). 1 2 15.00% Year Factor Project A Cash Flow Present Value Cumulative Cash Flow BET Net Present Value 15.00% Year Factor Project B Cash Flow Present Value Cumulative Cash Flow Net Present Value 10. Compute each project's accounting rate of return. (Round the percentage return to one decimal.) Project A T++ Year 1 Year 2 Year 3 Year 4 Year 5 b BET H P ED Hi The + iG BIUSA C D E 15210. Compute each project's accounting rate of return. (Round the percentage return to one decimal.) O 152 (54 Project A Year 1 Year 2 Year 3 Year 4 Year 5 155 156 157 150 150 Accounting Rate of Return 160 161 162 163 164 165 166 Project B Year 1 Year 2 Year 3 Year 4 Year 5 167 168 109 170 Accounting Rate of Return. 171 172 173 174 175 ++ A H 176 Analysis Component 177 178 179 180 fx 11. Identify the project you would recommend to management and explain your choice. Management does not clearly understand the financial calculations made as part of these project evaluations, so be sure to explain the "meaning" of the above calculations as the basis for your recommendation. The project chosen could be different among the groups depending on the weighting your team gives to risk. J P The Hi