Felicia & Fred?s executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided. Requirements:

1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:

• Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structure
• A 35% tax rate
• The cost of debt is now9%due to an additional default risk premium
• The beta of the company is 1.3
• The risk free rate is 2%
• The return on the market is 12%

Use the CAPM for calculation of the cost of equity.

2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:

• Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystals
• Project and equipment life is 5 years
• Incremental revenues will be $25 million per year
• Gross margin percentage is 40% (not including depreciation)
• Depreciation is computed at the straight-line rate for tax purposes
• Selling, general, and administrative expenses are 5% of sales
• Tax rate is 35%

Compute net present value and internal rate of return of the project.

3. Although crystal jewelry is extremely popular at the moment, Felicia & Fred are concerned about the product life cycle and would like to explore an abandonment option. Management asks for an additional scenario to be developed, reflecting a three- rather than a five-year life cycle for this project, including cash flows and asset life. Compute the net present value and internal rate of return given this change in parameter.

You may use Excel to complete this project. Attached is an Excel template to assist with working through this problem.

Short application 2 problem template_2_.xlsx

Also this assignment will be much like short paper assignment 3, however the concepts are to be expanded upon. As guidance you may want to review again the general discussion forum posting from week - Assembling a project Profile, NPV and IRR video. Here is the link to that : Video - NPV IRR

This is the part I need help with. Additionally, provide a 250?500 word executive summary on the results of the decision rule given these two scenarios with a five- and three-year project life, and revised WACC. Advise Felicia & Fred specifically regarding the abandonment option versus the initial five year project.

Short Application problem 1 - part 2 1) Calculate the new WACC We are told: Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calcul A 35% tax rate The cost of debt is now 9% due to an additional default risk premium The beta of the company is 1.3 The risk free rate is 2% The return on the market is 12% First calculate the expected cost of equity determined using the CAPM: CAPM = Risk Free Rate + Equity Beta * Market Risk Premium And we need to remember that market risk premium = Return on Market - Risk free rate So CAPM = Rrf + (beta*(retrurn on market - Rr2%+1.3*(12%-2%) Post-tax cost of debt 15.00% 5.85% Next calculate the WACC of the firm: WACC = (Weight Debt * Cost of Debt) + (Weight Equity * Cost of Equity ) and remember to calculate the cost of debt as Cost od debt*(1-Tax rate) WACC (70%*5.85%+30%*15%) 8.60% 2) Calculate the cash flows for the new crystal jewelry project given the following assumpt Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital Project and equipment life is 5 years Revenues are expected to increase to $25 million annually in each future year Gross margin percentage is 40% (not including depreciation) Depreciation is computed at the straight-line rate for tax purposes Selling, general, and administrative expenses are 5% of sales Tax rate is 35% Compute net present value and internal rate of return of the project Year 0 1 Revenues Gross Margin Sales & Admin Depreciation NWC Increase NWC Recovery Capital Expenditures FCF $ $ $ $ 25.00 10.00 1.25 4.00 20.00 25.00 $ 7.09 $ $ -$ Tax Discount Rate 5.00 35% 8.60% Wacc as found in part A = CFo + (NPV(WACC,FCF1,FCF2,FCF3,FCF4,FCF5) NPV Use NPV Formula IRR Use IRR formula =IRR(Cfo:Cf5) 3) Calculate the cash flows for the new crystal jewelry project given the same assumptions Year Revenues Gross Margin Sales & Admin Depreciation NWC Increase NWC Recovery Capital Expenditures FCF Tax Discount Rate 0 $ $ $ $ 25.00 10.00 1.25 6.67 20.00 25.00 $ 8.02 $ $ -$ 1 5.00 35% 8.60% Wacc as found in part A = CFo + (NPV(WACC,FCF1,FCF2,FCF3) NPV Use NPV Formula IRR Use IRR formula =IRR(Cfo:Cf5) entially reverses their previously calculated capital structure isk free rate ct given the following assumptions: y with $2 million for net working capital for metal inventory and $3 million for crystals 2 3 4 5 $ $ $ $ $ 25.00 10.00 1.25 4.00 $ $ $ $ 7.09 $ 25.00 10.00 $ 1.25 $ 4.00 $ 7.09 $ ### 10.00 1.25 4.00 $ $ $ $ 25.00 10.00 1.25 4.00 $ 5.00 7.09 $ 12.09 ound in part A NPV(WACC,FCF1,FCF2,FCF3,FCF4,FCF5) $ 6.17 16.93% ct given the same assumptions in part 2 but considering a 3 year option 2 $ $ $ $ $ 25.00 10.00 1.25 6.67 3 $ $ $ $ 25.00 10.00 1.25 6.67 $ 5.00 8.02 $ 13.02 ound in part A NPV(WACC,FCF1,FCF2,FCF3) -$ 0.65 7.26% Comments 25m per year 40% of revenues 5% of revenues 20 million over 5 years 5 million out year 0 5 million recovered end of project 20 Million FCF=((Gross Margin-Sales&Admin)*(1-tax rate))+(Depreciation*tax rate)-NWC Increase - Capex + NWC recovery at end of proje Comments Use guidelines above but adjust for a 3 year project - be sure to consider how depreciation will be charged of FCF=((Gross Margin-Sales&Admin)*(1-tax rate))+(Depreciation*tax rate)-NWC Increase - Capex + NWC recovery at end of proje ex + NWC recovery at end of project ex + NWC recovery at end of project