Dear consultants:

This is to formally inform you that we have accepted your proposal. I am looking

forward to your appraisal of our situation, as well as your recommendations. Please be

sure to include negatives and positives, even for your own recommendations, so that we

can make the best$-$informed decisions for our stockholders. And we would find it useful

if you would provide a sensitivity analysis. Please note that we do not need vague

suggestions. We need specifics and a good analysis of the costs and benefits of the

alternatives. Please be sure to clarify your assumptions.

As mentioned previously, our management does not currently have the capacity to

adopt two major projects at the same time. Therefore, please evaluate, qualitatively,

which of the two projects projects would likely be best, assuming that they have similar

positive results for financial value creation. Once you choose and justify a project based

on your qualitative analysis, please provide a detailed financial analysis of the chosen

project, as well as a detailed analysis and recommendation for financing. Keep in mind

that some of our top managers have no training in finance. Therefore, we need clear and

detailed explanations for your financial analysis and recommendations.

Your report should include the following:

An evaluation of your suggested project. $($Just use annual cash flows, not quarterly$).$Project evaluation is capital budgeting. To get the required return for this, you need the WACC.

As you conduct your analysis, please keep in mind that we have just changed

company policy concerning how flotation costs are included in project evaluations. We

now calculate a gross capital requirement to use in place of the initial investment number

in a project analysis. The formula is

Gross capital requirement $=$ initial investment$/(1-$ the weighted avg. flotation costs$).$

The weights are the same as those used in calculating the WACC. Also note that we

recently calculated our company beta to be $1\mathrm{.}38.$ Further, note that the case says that first

year outboard $$sales were estimated to be $$10,000($p$.4),$ but it should say $10,000$

units$,$ not dollars.

Here are some additional clarifications:

$1.$ The bond index in Exhibit $2$ is for Treasury bonds.

$2.$ Our recent bond issue sold at a premium of $$105.$ That means that it sold for

$$105$ above the standard par value for a corporate bond of $$1000.$

$3.$ The salvage values provided for land do not need to be adjusted for inflation

because they are the specific dollar estimates at salvage time. However, the

salvage values for buildings and equipment are given in current dollars.

Therefore, they need to be adjusted for inflation.

$4.$ For the front$-$end loader project, the $20\%$ growth is through Year $5.$ The $3\%$

growth begins with Year $6.$

$5.$ Since you are a U$.$S$.$ consulting firm, we want to remind you that depreciation for

tax purposes is different in Canada. For each year$$s depreciation, you must apply

the relevant CCA rate to the beginning book value that year for the relevant asset.

We look forward to your written report. We anticipate a thorough analysis. As you

write your report, please keep in mind that we are not trained in finance, so we need clear

explanations. Please also provide top management with a video summary of your

findings and recommendations. We anticipate an ongoing relationship. For example, in

the future we might contact you for a financial analysis of the project you rejected in the

qualitative analysis, or we might request assistance in the implementation of one of the

projects.

Best regards,

Patrick O$$Reilly

Chairman

please show the work in excel step by step.