ABC, Inc. produces widgets. They need to buy a new machine in order to increase revenues. Use the information above to answer the following questions. Be sure to show your work so you can receive partial credit.

1. Calculate the Payback period for Project Pro V1. Assume the company mandates a payback period of 2.5 years or less. Do you accept the project based on payback briefly explain your answer? (6 points)
2. Calculate the WACC for ABC, Inc. For the cost of equity component, calculate it using the SML we used in class. Check your Power Points or Excel Sheets if you aren't sure. (14 points)
3. Calculate the NPV for Project Pro V1 (Hint: before you ask me about the discount rate, I had you calculate WACC in part b for a reason). Do you accept the project based on NPV? Briefly explain your answer. (10 points)
4. Define AND Explain the purpose of BOTH scenario analysis and sensitivity analysis in making capital budgeting decisions. (10 points)
5. We stated in class that NPV always gives you the correct go/no go decision for a project. Why then should you examine other ratios? Give an example where one of these other ratios might change your decision on a project. (6 points)

6. ABC, Inc.
   Cash	$140,000		Accounts Payable	$184,000
   Accounts Receivable	$200,000		Notes Payable	$75,000
   Inventory	$640,000		Long-Term Debt	$302,500
   Fixed Assets	$413,000		Equity	$831,500
   Total Assets	$1,393,000		Total Liabilities and Equity	$1,393,000
   Sales	$860,000		Dividend Payout	40.00%
   Cost of Goods Sold	$430,000		Dividend per Share	$2.00
   Selling & Admin. Expenses	$250,000		Price of Stock Today	$39.50
   EBIT	$180,000		Beta	1.3335
   Interest Expense	$80,000		Risk Free	2.00%
   Taxable Income	$100,000		Risk Premium	6.00%
   Taxes 35%	$35,000		Coupon Rate	4.00%
   Net Income	$65,000		Tax Rate	35.00%
   			Par Value	$25,000
   Project Pro V1	Cash Flows
   Time 0	-$250,000
   Year 1	$80,000
   Year 2	$90,000
   Year 3	$100,000
   Year 4	$110,000