Capital Budgeting questions

Flash Memory, Inc. Exhibit 4 Selected Financial Information for Flash Memory, Inc., and Selected Competitors, 2007 through 2009 Flash Memory, Inc. Micron Technology 2007 2008 2009 30-Apr-10 (a) 2007 2008 2009 30-Apr-10 (a) 77 81 89 5,688 5,841 4,803 1.52 0.09 1.68 -0.42 -2.10 -2.29 1.46 n/a n/a n/a 7.25 2.64 10.56 9.35 1.492 1.492 1.492 769.1 772.5 800.7 847.6 11.43 11.52 13.20 10.08 8.00 5.81 6.61 13.28% 0.78% 12.75% -4.13% -26.21% -39.43% 21.00% 28% 34% 34% 24% 31% 40% 33% 72% 66% 66% 76% 69% 60% 67% n/a 1.25 SanDisk Corporation STEC, Inc. 3,986 3,351 3,567 189 227 354 0.84 -8.82 1.83 3.71 0.20 0.09 1.47 1.29 33.17 9.60 28.99 39.84 8.74 4.26 16.34 13.90 227.7 225.3 227.4 229.3 49.8 50.0 49.4 50.3 22.64 15.27 17.18 18.13 3.72 3.63 5.65 5.48 3.70% -57.74% 10.63% 17.87% 5.40% 2.36% 26.06% 18.90% 15% 22% 21% 19% 0% 0% 85% 78% 79% 81% 100% 100% 100% 100% 1.36 1.00Assignment Question Q1 Answers to the questions below will be found by closely examining the case. Detective work is required. If you uncover ambiguity (more than one possibility), mention both. COMPUTE WEIGHTED AVERAGE COST OF CAPITAL Formula Equation COST OF DEBT 7.25% 40.0% 18% COST OF EQUITY 3.70% 5.00% 1.20 Weighted-Average Cost of Capital 8.75% Q1. Find the sources of the numbers entered in B8, B9, and B11 and list them. Q1b. Find the sources of the numbers entered in B14, B15, and B16 and list them. HINT: Case Exhibit 4 lists, among other information, betas for three peers of Flash Memory. B15 is assumed, but explain what CFW says about the foibles of the 'risk premium', AKA 'equity risk premium'.Assignment Question Q2 The classic capital budgeting analysis for the new project line (page 4 of the Flash Memory case) is shown below. Read the 4 paragraphs under the Investment Opportunity subhead carefully. Most of the analysis is already completed. This assignment question requires you to examine the numbers and explain where they come from, and to enter the missing information in rows 29-33. CFW Chapter 5 explains the process, using the Generic Capital Budgeting Template. The Flash Memory template below is much shorter but contains the same information. base year ($00Os) 2010 2011 2012 2013 2014 2015 Investment in equipment -$2,200 Net working capital required (total from balance sheet each year) $5,648 $7,322 $7,322 $2,877 $1,308 $0 Investment in net working capital -$5,648 -$1,674 $0 $4,446 $1,569 $1,308 Sales $21,600 $28,000 $28,000 $11,000 $5,000 Cost of goods sold (includes depreciation) $17,064 $22,120 $22,120 $8,690 $3,950 Research & development $0 $0 $0 $0 $0 Selling, general & administrative $1,806 $2,341 $2,341 $920 $418 Launch promotion $300 $0 $0 SO $0 Income before income taxes $2,430 $3,539 $3,539 $1,390 $63 ncome taxes $972 $1,416 $1,416 $556 $25 Net income $1,458 $2,124 $2,124 $834 $379 Depreciation $440 $440 $440 $440 $44 Cash flow from operations $1,898 $2,564 $2,564 $1,274 $819 Total cash flow $7,848 $225 $2,564 $7,009 $2,843 $2,127 Cumulative total cash flow -$7,848 -$7,624 -$5,060 $1,949 $4,792 $6,919 k-wacc Enter it from previous tab NET PRESENT VALUE (NPV) PROFITABILITY INDEX (PI) INTERNAL RATE OF RETURN (IRR) PAYBACK PERIOD (PP) By inspection Q2a. Which rows contain balance sheet information? Which rows contain income statement information? Q2b. Explain the difference between the yellow-highlighted row 14 and row 15. In addition to digesting the details of Investment Opportunity (page 4), the 5th paragraph on page 2 and the Brd paragraph on page 3 offer background on working capital. Q2c. Explain the difference between rows 25 and 26. Q2d. Explain the difference between rows 26 and 27. Q2e. Enter the appropriate formula in B30, B31, and B32, and the correct value in B33. Q2f. Recommend either accepting or rejecting the project, and explain your reasoning. Cite specific numbers