Acme Components Company Basics of Capital Budgeting You recently went to work for Acme Components Company, a supplier of auto repair parts used in the after-market with products from Daimler AG, Ford, Toyota, and other automakers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project Linvolves adding a new item to the firm's ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 4-year lives because Acme is planning to introduce entirely new models after 4 years. Depreciation, salvage values, net operating working capital requirements, and tax effects are all included in these cash flows. The CFO also made subjective risk assessments of each project, and he concluded that both projects have risk characteristics that are similar to the firm's average project. Acme's WACC is 10%. You must determine whether one or both of the projects should be accepted. Acme Components Company Basics of Capital Budgeting 0 4 Yellow = cells you need to input Green = cells you need to calculate and the answers for D2L Cash flows from each project 1 2 3 1 5 60 100 125 100 60 125 Project L Projects -125 - 125 Total $ 165.00 $ 165.00 5 WACC Project S: #1) What is the NPV of each project? Project L: be careful - this is a different calculation for excel than for a calculator #2) What is each project's IRR? Project L: Project S: #3) What is each project's payback? Project L: years Project S: Ilyears #4) What is each project's MIRR if the WACC equals both rates? Project L: Project S: #5) Assuming the projects are mutually exclusive, which project would you recommend to your CFO? a) Project L because its NPV is higher b) Project S because its NPV is higher Projects -125 125 100 60 5 $ 165.00 WACC #1) What is the NPV of each project? Project L: be careful - this is a different calculation for excel than for a calculator Project S: #2) What is each project's IRR? Project L: Project S: #3) What is each project's payback? Project L: years Project S: years #4) What is each project's MIRR if the WACC equals both rates? Project L: Project S: #5) Assuming the projects are mutually exclusive, which project would you recommend to your CFO? a) Project L because its NPV is higher b) Project S because its NPV is higher c) Project L because its payback is shorter d) Project S because its payback is shorter