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. a. Calculate the Payback period for Project Pro V1. Assume the company mandates a payback period of 3.5 years or less. Do you accept the project based on payback - briefly explain your answer? (6 points) b. Calculate the WACC for ABC, Inc. For the cost of equity component, calculate it using the DGM (Dividend Growth Model) we used in class. Check your Power Points or Excel Sheets. If you aren't sure. (14 points) c. Calculate the NPV for Project Pro V1 (Hint: before you ask me about the discount rate, that you calculate WACC in part b for a reason). Do you accept the project based on NPV? - Briefly explain your answer. (10 points) d. Define AND explain the purpose of BOTH scenario analysis and sensitivity analysis in making capital budgeting decisions (10 points) e. We stated in class that NPV always gives you the correct goo 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) $190.000 Accounts Payable $250,000 f. Cash Accounts Receivable Inventory Current Assets Fixed Assets $250,000 $75,000 $350,000 $675,000 $955,000 $1,630,000 Total Assets $190,000 Accounts Payable $240,000 Notes Payable no $700,000 Long-Term Debt $1,130,000 Total Liabilities $500,000 Equity Total Liabilities & Equity $1,630,000 Diviend Payout Dividend per Share $10,800,000 Price of Stock Today $5,520,000 Retention Ratio $5,280,000 ROE $3,360,000 Growth Rate $600,000 D1 $1,320,000 Coupon Rate $1,020,000 Tax Rate $300,000 S60,000 $240,000 Sales Cost of Goods Sold Gross Profit Selling & Admin. Expenses Depreciation EBIT Interest Expense Taxable income Taxes 20% Net Income 80.00% $0.75 $39.50 20.00% 25.1396 You need to calculate You need to calculate 4.50% 20.0096 Project Provi Time Cash Flows 1 0 -$275,000 2 $75,000 3 $80,000 $70,000 $75,000 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. a. Calculate the Payback period for Project Pro V1. Assume the company mandates a payback period of 3.5 years or less. Do you accept the project based on payback - briefly explain your answer? (6 points) b. Calculate the WACC for ABC, Inc. For the cost of equity component, calculate it using the DGM (Dividend Growth Model) we used in class. Check your Power Points or Excel Sheets. If you aren't sure. (14 points) c. Calculate the NPV for Project Pro V1 (Hint: before you ask me about the discount rate, that you calculate WACC in part b for a reason). Do you accept the project based on NPV? - Briefly explain your answer. (10 points) d. Define AND explain the purpose of BOTH scenario analysis and sensitivity analysis in making capital budgeting decisions (10 points) e. We stated in class that NPV always gives you the correct goo 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) $190.000 Accounts Payable $250,000 f. Cash Accounts Receivable Inventory Current Assets Fixed Assets $250,000 $75,000 $350,000 $675,000 $955,000 $1,630,000 Total Assets $190,000 Accounts Payable $240,000 Notes Payable no $700,000 Long-Term Debt $1,130,000 Total Liabilities $500,000 Equity Total Liabilities & Equity $1,630,000 Diviend Payout Dividend per Share $10,800,000 Price of Stock Today $5,520,000 Retention Ratio $5,280,000 ROE $3,360,000 Growth Rate $600,000 D1 $1,320,000 Coupon Rate $1,020,000 Tax Rate $300,000 S60,000 $240,000 Sales Cost of Goods Sold Gross Profit Selling & Admin. Expenses Depreciation EBIT Interest Expense Taxable income Taxes 20% Net Income 80.00% $0.75 $39.50 20.00% 25.1396 You need to calculate You need to calculate 4.50% 20.0096 Project Provi Time Cash Flows 1 0 -$275,000 2 $75,000 3 $80,000 $70,000 $75,000
