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CAPITAL BUDGETING CASE STUDY ANALYSIS ACME Inc. is a multinational conglomerate corporation providing a wide range of goods and services to its customers. As part of its budgeting process for the next year, it has several projects under consideration so it must decide which projects should receive capital budgeting investment funds for this year. As part of the financial analysis department, you have been given several projects to evaluate. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm since it is used as a threshold of acceptability for projects. Remember that management has a preference in using the market values of the firm's capital structure and believes it current structure (target weight/market weight) is optimal. Market Values of Capital 1. The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78. 2. You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. 3. The company has 5 million shares of common stock outstanding with a currently price of $17.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.65. 4. The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 13 percent. Your stock's beta is 1.22. 5. Your firm only uses bonds for long-term financing. 6. Your firm's federal + state marginal tax rate is 40%. (Ignore any carryforward implications) Depreciation Schedule Modified Accelerated Cost Recovery System (MACRS) 5-Year Investment Class Ownership Year Depreciation Schedule 1 20% 2 32% 3 19% 4 12% 5 11% 6 6% Total = 100% CAPITAL BUDGETING CASE STUDY ANALYSIS Requirements Each Student will be provided two (2) projects which they will evaluate. Students are expected to report the results of their analysis in Week 6 in a PowerPoint slides presentation. Groups will also submit spreadsheet work for all sections. Calculations for all parts will be graded in the spreadsheet score in Week 6. Capital Budgeting Assignment - Part 1 Section 1 (10% of total grade) Find the costs of the individual capital components: long-term debt (before tax and after tax) preferred stock average cost of retained earnings (avg. of Capital Asset Pricing Model & Gordon Growth Model/Constant Growth Model) Section 2 (15% of total grade) Determine the target percentages for the optimal capital structure, and then compute the WACC. Carry weights to a minimum of four decimal places, but rounding in calculations is not necessary. (i.e. 0.2973 or 29.73%) Section 3, Part 1 (30% of total grade) Select one (1) of the projects assignment and create a valuation spreadsheet for the project provided by your instructor. You should use your Use the spreadsheet template provided to structure your valuation analysis. Evaluate each project according to the following valuation methods: Net Present Value of Discounted Cash Flow (use WACC number for discount rate) Internal Rate of Return Payback Period Profitability Index (use WACC number for discount rate) CAPITAL BUDGETING CASE STUDY ANALYSIS Capital Budgeting Assignment - Part 2 Section 3, Part 2 (30% of total grade) Create valuation spreadsheets for both projects and/or revise your valuation based on Part 1 completion. Use the spreadsheet template provided to structure your valuation analysis. Evaluate each project according to the following valuation methods: Net Present Value of Discounted Cash Flow (use WACC number for discount rate) Internal Rate of Return Payback Period Profitability Index (use WACC number for discount rate) Provide a synopsis evaluation of each project and provide a clear recommendation of which project management will accept for its capital expenditures budget based on textbook decision rules. Section 4 (15% of total grade) Create a second valuation spreadsheet of the projects provided by your instructor. This should measure the sensitivity of the project as reflected by a 10% reduction in price. Evaluate both projects according to the following valuation method: Net Present Value of Discounted Cash Flow (use WACC number for discount rate) Provide a synopsis evaluation of each project and provide a clear recommendation of which project management will accept for its capital expenditures budget based on textbook decision rules. Section 5 (15% of total grade) Create a third valuation spreadsheet of the projects provided by your instructor. This should measure the sensitivity of the project as reflected by a 10% reduction in sales volume. Evaluate both projects according to the following valuation method: Net Present Value of Discounted Cash Flow (use WACC number for discount rate) Provide a synopsis evaluation of each project and provide a clear recommendation of which project management will accept for its capital expenditures budget based on textbook decision rules. Section 6 (15% of total grade) Provide an evaluation of all the analyses from the previous sections and explain the implication of sensitive analysis on pro forma estimates of future projects. Discuss the benefits and limitations of this analysis and how it could be used in the professional environment. CAPITAL BUDGETING CASE STUDY ANALYSIS Project A: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $130,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $250,000. The project will last 6 years at which time the market value for the equipment will be $150,000. The project will project a product with a sales price of $20.00 per unit and the variable cost per unit will be $10.00. The fixed costs would be $200,000 per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of 2 percentage point below its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 70,000 2015 100,000 2016 65,000 2017 70,000 2018 65,000 2019 55,000 Project B: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $100,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $70,000. The project will last 6 years at which time the market value for the equipment will be $50,000. The project will project a product with a sales price of $40.00 per unit and the variable cost per unit will be $15.00. The fixed costs would be $150,000 per year. Because this project is not close to current products sold by the business, management wants adjust the risk profile of this analysis by imposing a 2 percentage point increase over the firm's WACC. Years Forecasted Units Sold 2014 50,000 2015 60,000 2016 70,000 2017 80,000 2018 90,000 2019 80,000 Project C: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $50,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $120,000. The project will last 6 years at which time the market value for the equipment will be $200,000. The project will project a product with a sales price of $30.00 per unit and the variable cost per unit will be $10.00. The fixed costs would be $100,000 per year. Because this project is very close to current products sold by the business, management wants you to apply the WACC as the discount rate to the project. Years Forecasted Units Sold 2014 30,000 2015 40,000 2016 50,000 2017 60,000 2018 70,000 2019 80,000 CAPITAL BUDGETING CASE STUDY ANALYSIS Project D: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $200,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $125,000. The project will last 6 years at which time the market value for the equipment will be $20,000. The project will project a product with a sales price of $25.00 per unit and the variable cost per unit will be $12.00. The fixed costs would be $350,000 per year. Because this project is not similar to current products sold by the business, management wants to impose a 3 percentage point premium on its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 70,000 2015 100,000 2016 65,000 2017 70,000 2018 65,000 2019 55,000 Project E: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $100,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $200,000. The project will last 6 years at which time the market value for the equipment will be $100,000. The project will project a product with a sales price of $22.00 per unit and the variable cost per unit will be $10.00. The fixed costs would be $250,000 per year. Because this project is very close to current products sold by the business, management want to use the current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 100,000 2015 90,000 2016 80,000 2017 70,000 2018 60,000 2019 50,000 Project F: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $100,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $230,000. The project will last 6 years at which time the market value for the equipment will be $0. The project will project a product with a sales price of $20.00 per unit and the variable cost per unit will be $7.00. The fixed costs would be $300,000 per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of 4 percentage point below its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 80,000 2015 80,000 2016 80,000 2017 80,000 2018 80,000 2019 80,000 CAPITAL BUDGETING CASE STUDY ANALYSIS Project G: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $200,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $40,000. The project will last 6 years at which time the market value for the equipment will be $10,000. The project will project a product with a sales price of $95.00 per unit and the variable cost per unit will be $40.00. The fixed costs would be $450,000 per year. Because this project is very different to current products sold by the business, management has imposed a 2.5 percentage point premium above its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 20,000 2015 50,000 2016 40,000 2017 30,000 2018 20,000 2019 10,000 Project H: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $100,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $80,000. The project will last 6 years at which time the market value for the equipment will be $10,000. The project will project a product with a sales price of $100.00 per unit and the variable cost per unit will be $45.00. The fixed costs would be $550,000 per year. Because this project is very different to current products sold by the business, management has imposed a 3 percentage point premium above its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 19,000 2015 45,000 2016 38,000 2017 32,000 2018 18,000 2019 12,000 Project I: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $250,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $100,000. The project will last 6 years at which time the market value for the equipment will be $30,000. The project will project a product with a sales price of $120.00 per unit and the variable cost per unit will be $65.00. The fixed costs would be $500,000 per year. Because this project is very different to current products sold by the business, management has imposed a 2 percentage point premium above its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 21,000 2015 55,000 2016 44,000 2017 28,000 2018 25,000 2019 11,000 CAPITAL BUDGETING CASE STUDY ANALYSIS Project J: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $50,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $150,000. The project will last 6 years at which time the market value for the equipment will be $120,000. The project will project a product with a sales price of $20.00 per unit and the variable cost per unit will be $8.00. The fixed costs would be $220,000 per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of 2 percentage point below its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 72,000 2015 95,000 2016 70,000 2017 63,000 2018 61,000 2019 52,000 Project K: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $150,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $90,000. The project will last 6 years at which time the market value for the equipment will be $60,000. The project will project a product with a sales price of $35.00 per unit and the variable cost per unit will be $15.00. The fixed costs would be $200,000 per year. Because this project is not close to current products sold by the business, management wants adjust the risk profile of this analysis by imposing a 2 percentage point increase over the firm's WACC. Years Forecasted Units Sold 2014 55,000 2015 65,000 2016 75,000 2017 85,000 2018 95,000 2019 85,000 Project L: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $75,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $100,000. The project will last 6 years at which time the market value for the equipment will be $180,000. The project will project a product with a sales price of $32.00 per unit and the variable cost per unit will be $11.00. The fixed costs would be $110,000 per year. Because this project is very close to current products sold by the business, management wants you to apply the WACC as the discount rate to the project. Years Forecasted Units Sold 2014 32,000 2015 45,000 2016 48,000 2017 58,000 2018 75,000 2019 90,000 CAPITAL BUDGETING CASE STUDY ANALYSIS ACME Inc. is a multinational conglomerate corporation providing a wide range of goods and services to its customers. As part of its budgeting process for the next year, it has several projects under consideration so it must decide which projects should receive capital budgeting investment funds for this year. As part of the financial analysis department, you have been given several projects to evaluate. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm since it is used as a threshold of acceptability for projects. Remember that management has a preference in using the market values of the firm's capital structure and believes it current structure (target weight/market weight) is optimal. Market Values of Capital 1. The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78. Coupon PMT = 10%*1000/2 = 50 No of periods nper = 2*15 = 30 Current price PV = 874.78 So Yield Kd = 2*rate(nper,pmt,pv,fv) = 2*rate(30,50,-874.78,1000) = 11.80% 2. You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Return on Pref stock Kp = Div/Current price = 9%*100/90 = 10% 3. The company has 5 million shares of common stock outstanding with a currently price of $17.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.65. Return on Equity Ks = D0*(1+g)/P0 + g = 0.65*(1+10%)/17 + 10% = 14.21% 4. The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 13 percent. Your stock's beta is 1.22. Return on equity Ke = Krf + beta*(Km-Krf) = 6% + 1.22*(13%-6%) = 14.54% 5. Your firm only uses bonds for long-term financing. 6. Your firm's federal + state marginal tax rate is 40%. (Ignore any carryforward implications) Depreciation Schedule Modified Accelerated Cost Recovery System (MACRS) 5-Year Investment Class Ownership Year Depreciation Schedule 1 20% 2 32% 3 19% 4 12% 5 11% 6 6% Total = 100% Capital Budgeting Assignment Section 1 Find the costs of the individual capital components: long-term debt (before tax and after tax) Kd = 11.80%, After Tax Kd = Kd*(1-T) = 11.80%*(1-40%) = 7.08% preferred stock Kp = 10% average cost of retained earnings (avg. of Capital Asset Pricing Model & Gordon Growth Model/Constant Growth Model) Ke = (14.21% + 14.54%)/2 = 14.37% Section 2 Determine the target percentages for the optimal capital structure, and then compute the WACC. Carry weights to a minimum of four decimal places, but rounding in calculations is not necessary. (i.e. 0.2973 or 29.73%) Market value of Debt D = 60,000*874.78 = $52,486,800 Market Value of Equity E = 5M*17 = $85,000,000 Market value of Pref stock P = 100,000 *$90 = 9,000,000 D E P Value of FirmV $52,486,800 $85,000,000 $9,000,000 $146,486,800 0.3583 0.5803 0.0614 1.0000 WACC = Wd*Kd*(1-T) + We*Ke +Wp*Kp = 0.3583*7.08% + 0.5803*14.37% + 0.0614*10% = 11.49% Section 3 Select one (1) of the projects assignment and create a valuation spreadsheet for the project provided by your instructor. You should use your Use the spreadsheet template provided to structure your valuation analysis. Evaluate each project according to the following valuation methods: Net Present Value of Discounted Cash Flow (use WACC number for discount rate) Internal Rate of Return Payback Period Profitability Index (use WACC number for discount rate) Project A: This project requires an initial investment of $2,000,000 in equipment which will cost an additional $130,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $250,000. The project will last 6 years at which time the market value for the equipment will be $150,000. The project will project a product with a sales price of $20.00 per unit and the variable cost per unit will be $10.00. The fixed costs would be $200,000 per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of 2 percentage point below its current WACC as the valuation hurdle it must meet or surpass. Years Forecasted Units Sold 2014 70,000 2015 100,000 2016 65,000 MORE INFORMATION For the Share Float = 20 million shares. Amount = $10 per share. Preferred stock = 10 million shares for the float. 2017 70,000 2018 65,000 2019 55,000 Price Variable Cost Required Return Salvage Value Initial Cost Installation Cost Increase in NWC $ $ $ $ $ $ 20.00 10.00 9.49% 150,000 2,000,000 130,000 250,000 Year 0 Fixed Cost Units sold Depreciation Rate Sales Variable Cost Fixed Cost EBITDA Depreciation EBIT Tax Expense Net Income Operating Cash Flow Non-operating Cash Flow Capital Expenditure $ Net Working Capital $ $ Internal Rate of Ret Net Present Value $ Payback Period Profitability Index 11.80% 14.21% 14.54% WACC Year 1 Year 2 Inflation Rate 7.08% 14.37% 11.49% Year 3 0% D E P Value of FirmV Year 4 70,000 20.0% 100,000 32.0% 65,000 19.0% 70,000 12.0% 1 $1,400,000 $700,000 $200,000 $500,000 $426,000 $74,000 $29,600 $44,400 2 $2,000,000 $1,000,000 $200,000 $800,000 $681,600 $118,400 $47,360 $71,040 3 $1,300,000 $650,000 $200,000 $450,000 $404,700 $45,300 $18,120 $27,180 4 $1,400,000 $700,000 $200,000 $500,000 $255,600 $244,400 $97,760 $146,640 $470,400 $752,640 $431,880 $402,240 Total Cash Flows Year 2 Year 3 $752,640 $431,880 Year 4 $402,240 (2,130,000) (250,000) Year 0 (2,380,000) 7.51% (133,542) 4.11 Years 1.05 Year 1 $470,400 Tax Rate $52,486,800 $85,000,000 $9,000,000 $146,486,800 40% 0.3583 0.5803 0.0614 1.0000 Year 5 Year 6 65,000 11.0% 55,000 6.0% 5 $1,300,000 $650,000 $200,000 $450,000 $234,300 $215,700 $86,280 $129,420 6 $1,100,000 $550,000 $200,000 $350,000 $127,800 $222,200 $88,880 $133,320 $363,720 $261,120 $90,000 $ Year 5 $363,720 250,000 Year 6 $601,120 Solution: Cost of individual capital components Long term debt No. of bonds Nper Semi annual coupn Current price 60000 15 10% 874.78 Calulating the YTM Annual = 5.90% 11.80% Pre cost of debt = Tax rate = After tax cost of debt = = 11.80% 40% Pretax cost of debt*(1-tax rate) 7.08% Preferred Stock No. of stock Par value Dividend Current market price Flotation cost Cost of preferred stock = = = 100000 100 9% 90 3 Dividend Current price - floatation cost 9 90-3 10.34% Cost of retained Earnings No. of shares Current price Growth rate Last dividend Floatation cost Risk free rate Rate of return Beta 5000000 14 10% 0.8 15% 6% 14% 1.22 Using dividend growth model: Required rate of return = D1 + Current price - floatation cost = 0.88 11.9 = + 17.39% Using CAPM Required rate of return = = = Risk free rate + beta *(Expected return - risk free rate) 6%+1.22*(14%-6%) 15.76% Average of CAPM and DCF 16.58% Calculating the target percentage of capital structure No. of shares / bonds Current market value Debt 60000 874.78 Preferred Stock 100000 90 Equity 5000000 14 Total Calculating Weighted average cost of capital WACC = cost of debt * weight of debt + cost of equity * Weight of equity + Weight of preferred stock * Cost of WACC = 12.36% Project A Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax 0 $20,000,000.00 $3,000,000.00 $3,500,000.00 1 $20.00 $10.00 700000 $14,000,000.00 $7,000,000.00 $2,000,000.00 $4,600,000.00 $400,000.00 $160,000.00 Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows NPV = IRR = Payback period = Profitability index = $240,000.00 $4,600,000.00 -$26,500,000.00 -$26,500,000.00 $4,840,000.00 -$21,660,000.00 -$4,919,383.69 5.36% 5.24 0.81 Project B Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows NPV = IRR = Payback period = Profitability index = 0 $20,000,000.00 $1,000,000.00 $6,000,000.00 1 $6.50 $4.00 3500000 $22,750,000.00 $14,000,000.00 $1,000,000.00 $4,200,000.00 $3,550,000.00 $1,420,000.00 $2,130,000.00 $4,200,000.00 -$27,000,000.00 -$27,000,000.00 $6,330,000.00 -$20,670,000.00 $20,925,000.00 17.78% 4.29 1.78 Project C Year Initial investment 0 $20,000,000.00 1 Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows $5,000,000.00 $6,000,000.00 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = -$26,755,517.49 20.51% 4.08 0.14 $90.00 $65.00 500000 $45,000,000.00 $32,500,000.00 $5,000,000.00 $5,000,000.00 $2,500,000.00 $1,000,000.00 $1,500,000.00 $5,000,000.00 $6,500,000.00 -$24,500,000.00 Considering all the aspects, project B should be accepted as it has positive NPV and fulfills all the aspects Sensitivity Analysis 10% reduction in price Project A Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax 0 $20,000,000.00 $3,000,000.00 $3,500,000.00 1 $18.00 $10.00 700000 $12,600,000.00 $7,000,000.00 $2,000,000.00 $4,600,000.00 -$1,000,000.00 -$400,000.00 -$600,000.00 Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows NPV = IRR = Payback period = Profitability index = $4,600,000.00 -$26,500,000.00 -$26,500,000.00 $4,000,000.00 -$22,500,000.00 $0.00 0.00% 6.00 1.00 Project B Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows NPV = IRR = Payback period = Profitability index = 0 $20,000,000.00 $1,000,000.00 $6,000,000.00 1 $5.85 $4.00 3500000 $20,475,000.00 $14,000,000.00 $1,000,000.00 $4,200,000.00 $1,275,000.00 $510,000.00 $765,000.00 $4,200,000.00 -$27,000,000.00 -$27,000,000.00 $4,965,000.00 -$22,035,000.00 $11,272,500.00 10.02% 4.93 1.42 Project C Year Initial investment Installation cost 0 $20,000,000.00 $5,000,000.00 1 Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows $6,000,000.00 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = -$27,706,488.13 6.26% 5.32 0.11 $81.00 $65.00 500000 $40,500,000.00 $32,500,000.00 $5,000,000.00 $5,000,000.00 -$2,000,000.00 -$800,000.00 -$1,200,000.00 $5,000,000.00 $3,800,000.00 -$27,200,000.00 10% reduction in sales volume Project A Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows 0 $20,000,000.00 $3,000,000.00 $3,500,000.00 1 $20.00 $10.00 630000 $12,600,000.00 $6,300,000.00 $2,000,000.00 $4,600,000.00 -$300,000.00 -$120,000.00 -$180,000.00 $4,600,000.00 -$26,500,000.00 -$26,500,000.00 $4,420,000.00 -$22,080,000.00 NPV = IRR = Payback period = Profitability index = $2,550,000.00 2.72% 5.60 1.10 Project B Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows NPV = IRR = Payback period = Profitability index = 0 $20,000,000.00 $1,000,000.00 $6,000,000.00 1 $6.50 $4.00 3150000 $20,475,000.00 $12,600,000.00 $1,000,000.00 $4,200,000.00 $2,675,000.00 $1,070,000.00 $1,605,000.00 $4,200,000.00 -$27,000,000.00 -$27,000,000.00 $5,805,000.00 -$21,195,000.00 $17,212,500.00 14.87% 4.51 1.64 Project C Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product Sales volume Sales revenue Variable Cost 0 $20,000,000.00 $5,000,000.00 $6,000,000.00 1 $90.00 $65.00 450000 $40,500,000.00 $29,250,000.00 Fixed cost Depreciation EBIT Tax Earnings after tax Add: Depreciation Add: Working capital recovered Salvage value Net operating cash flows Cumulative cash flows $5,000,000.00 $5,000,000.00 $1,250,000.00 $500,000.00 $750,000.00 $5,000,000.00 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = -$26,872,276.12 16.76% 4.37 0.13 $5,750,000.00 -$25,250,000.00 Synopsis Project A Considering project A, we can say that project provides negative NPV as well as low IRR, thus the project shoul Project B Considering project B, we can say that the project provides positive NPV along with required rate return on the the sales price and volume, the project will be providing positive return, thus this project fulfills the capital expe Project C Project C has the hightest negative NPV and thus is not an acceptable project growth 10% urn - risk free rate) Total value Weights 52486800 39.92% 9000000 6.84% 70000000 53.24% 131486800 100.00% eight of preferred stock * Cost of preferred stock Project A 2 $20.00 $10.00 1000000 $20,000,000.00 $10,000,000.00 $2,000,000.00 $7,360,000.00 $640,000.00 $256,000.00 3 4 5 6 $20.00 $20.00 $20.00 $20.00 $10.00 $10.00 $10.00 $10.00 650000 700000 650000 550000 $13,000,000.00 $14,000,000.00 $13,000,000.00 $11,000,000.00 $6,500,000.00 $7,000,000.00 $6,500,000.00 $5,500,000.00 $2,000,000.00 $2,000,000.00 $2,000,000.00 $2,000,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 $1,380,000.00 $130,000.00 $2,240,000.00 $1,970,000.00 $2,120,000.00 $52,000.00 $896,000.00 $788,000.00 $848,000.00 $384,000.00 $7,360,000.00 $7,744,000.00 -$13,916,000.00 $78,000.00 $4,370,000.00 $1,344,000.00 $2,760,000.00 $1,182,000.00 $2,530,000.00 $4,448,000.00 $4,104,000.00 $3,712,000.00 -$9,468,000.00 -$5,364,000.00 -$1,652,000.00 $1,272,000.00 $1,380,000.00 $3,500,000.00 $600,000.00 $6,752,000.00 $5,100,000.00 Project B 2 $6.50 $4.00 4000000 $26,000,000.00 $16,000,000.00 $1,000,000.00 $6,720,000.00 $2,280,000.00 $912,000.00 $1,368,000.00 $6,720,000.00 $8,088,000.00 -$12,582,000.00 3 4 5 6 $6.50 $6.50 $6.50 $6.50 $4.00 $4.00 $4.00 $4.00 4250000 4500000 4300000 4200000 $27,625,000.00 $29,250,000.00 $27,950,000.00 $27,300,000.00 $17,000,000.00 $18,000,000.00 $17,200,000.00 $16,800,000.00 $1,000,000.00 $1,000,000.00 $1,000,000.00 $1,000,000.00 $3,990,000.00 $2,520,000.00 $2,310,000.00 $1,260,000.00 $5,635,000.00 $7,730,000.00 $7,440,000.00 $8,240,000.00 $2,254,000.00 $3,092,000.00 $2,976,000.00 $3,296,000.00 $3,381,000.00 $4,638,000.00 $4,464,000.00 $4,944,000.00 $3,990,000.00 $2,520,000.00 $2,310,000.00 $1,260,000.00 $6,000,000.00 $0.00 $7,371,000.00 $7,158,000.00 $6,774,000.00 $12,204,000.00 -$5,211,000.00 $1,947,000.00 $8,721,000.00 $20,925,000.00 Project C 2 3 4 5 6 $90.00 $65.00 600000 $54,000,000.00 $39,000,000.00 $5,000,000.00 $8,000,000.00 $2,000,000.00 $800,000.00 $1,200,000.00 $8,000,000.00 $9,200,000.00 -$15,300,000.00 $90.00 $90.00 $90.00 $90.00 $65.00 $65.00 $65.00 $65.00 700000 800000 800000 600000 $63,000,000.00 $72,000,000.00 $72,000,000.00 $54,000,000.00 $45,500,000.00 $52,000,000.00 $52,000,000.00 $39,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $1,500,000.00 $7,750,000.00 $12,000,000.00 $12,250,000.00 $8,500,000.00 $3,100,000.00 $4,800,000.00 $4,900,000.00 $3,400,000.00 $4,650,000.00 $7,200,000.00 $7,350,000.00 $5,100,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $1,500,000.00 $6,000,000.00 $3,000,000.00 $9,400,000.00 $10,200,000.00 $10,100,000.00 $15,600,000.00 -$5,900,000.00 $4,300,000.00 $14,400,000.00 $30,000,000.00 V and fulfills all the aspects Project A 2 $18.00 $10.00 1000000 $18,000,000.00 $10,000,000.00 $2,000,000.00 $7,360,000.00 -$1,360,000.00 -$544,000.00 -$816,000.00 3 4 5 6 $18.00 $18.00 $18.00 $10.00 $10.00 $10.00 650000 700000 650000 $11,700,000.00 $12,600,000.00 $11,700,000.00 $6,500,000.00 $7,000,000.00 $6,500,000.00 $2,000,000.00 $2,000,000.00 $2,000,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 -$1,170,000.00 $840,000.00 $670,000.00 -$468,000.00 $336,000.00 $268,000.00 -$702,000.00 $504,000.00 $402,000.00 $18.00 $10.00 550000 $9,900,000.00 $5,500,000.00 $2,000,000.00 $1,380,000.00 $1,020,000.00 $408,000.00 $612,000.00 $7,360,000.00 $6,544,000.00 -$15,956,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 $3,668,000.00 $3,264,000.00 $2,932,000.00 -$12,288,000.00 -$9,024,000.00 -$6,092,000.00 $1,380,000.00 $3,500,000.00 $600,000.00 $6,092,000.00 $0.00 Project B 2 $5.85 $4.00 4000000 $23,400,000.00 $16,000,000.00 $1,000,000.00 $6,720,000.00 -$320,000.00 -$128,000.00 -$192,000.00 $6,720,000.00 $6,528,000.00 -$15,507,000.00 3 4 5 6 $5.85 $5.85 $5.85 $5.85 $4.00 $4.00 $4.00 $4.00 4250000 4500000 4300000 4200000 $24,862,500.00 $26,325,000.00 $25,155,000.00 $24,570,000.00 $17,000,000.00 $18,000,000.00 $17,200,000.00 $16,800,000.00 $1,000,000.00 $1,000,000.00 $1,000,000.00 $1,000,000.00 $3,990,000.00 $2,520,000.00 $2,310,000.00 $1,260,000.00 $2,872,500.00 $4,805,000.00 $4,645,000.00 $5,510,000.00 $1,149,000.00 $1,922,000.00 $1,858,000.00 $2,204,000.00 $1,723,500.00 $2,883,000.00 $2,787,000.00 $3,306,000.00 $3,990,000.00 $2,520,000.00 $2,310,000.00 $1,260,000.00 $6,000,000.00 $0.00 $5,713,500.00 $5,403,000.00 $5,097,000.00 $10,566,000.00 -$9,793,500.00 -$4,390,500.00 $706,500.00 $11,272,500.00 Project C 2 3 4 5 6 $81.00 $65.00 600000 $48,600,000.00 $39,000,000.00 $5,000,000.00 $8,000,000.00 -$3,400,000.00 -$1,360,000.00 -$2,040,000.00 $8,000,000.00 $5,960,000.00 -$21,240,000.00 $81.00 $81.00 $81.00 $81.00 $65.00 $65.00 $65.00 $65.00 700000 800000 800000 600000 $56,700,000.00 $64,800,000.00 $64,800,000.00 $48,600,000.00 $45,500,000.00 $52,000,000.00 $52,000,000.00 $39,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $1,500,000.00 $1,450,000.00 $4,800,000.00 $5,050,000.00 $3,100,000.00 $580,000.00 $1,920,000.00 $2,020,000.00 $1,240,000.00 $870,000.00 $2,880,000.00 $3,030,000.00 $1,860,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $1,500,000.00 $6,000,000.00 $3,000,000.00 $5,620,000.00 $5,880,000.00 $5,780,000.00 $12,360,000.00 -$15,620,000.00 -$9,740,000.00 -$3,960,000.00 $8,400,000.00 Project A 2 3 4 5 6 $20.00 $10.00 900000 $18,000,000.00 $9,000,000.00 $2,000,000.00 $7,360,000.00 -$360,000.00 -$144,000.00 -$216,000.00 $7,360,000.00 $20.00 $20.00 $20.00 $10.00 $10.00 $10.00 585000 630000 585000 $11,700,000.00 $12,600,000.00 $11,700,000.00 $5,850,000.00 $6,300,000.00 $5,850,000.00 $2,000,000.00 $2,000,000.00 $2,000,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 -$520,000.00 $1,540,000.00 $1,320,000.00 -$208,000.00 $616,000.00 $528,000.00 -$312,000.00 $924,000.00 $792,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 $7,144,000.00 -$14,936,000.00 $4,058,000.00 $3,684,000.00 $3,322,000.00 -$10,878,000.00 -$7,194,000.00 -$3,872,000.00 $20.00 $10.00 495000 $9,900,000.00 $4,950,000.00 $2,000,000.00 $1,380,000.00 $1,570,000.00 $628,000.00 $942,000.00 $1,380,000.00 $3,500,000.00 $600,000.00 $6,422,000.00 $2,550,000.00 Project B 2 $6.50 $4.00 3600000 $23,400,000.00 $14,400,000.00 $1,000,000.00 $6,720,000.00 $1,280,000.00 $512,000.00 $768,000.00 $6,720,000.00 $7,488,000.00 -$13,707,000.00 3 4 5 6 $6.50 $6.50 $6.50 $6.50 $4.00 $4.00 $4.00 $4.00 3825000 4050000 3870000 3780000 $24,862,500.00 $26,325,000.00 $25,155,000.00 $24,570,000.00 $15,300,000.00 $16,200,000.00 $15,480,000.00 $15,120,000.00 $1,000,000.00 $1,000,000.00 $1,000,000.00 $1,000,000.00 $3,990,000.00 $2,520,000.00 $2,310,000.00 $1,260,000.00 $4,572,500.00 $6,605,000.00 $6,365,000.00 $7,190,000.00 $1,829,000.00 $2,642,000.00 $2,546,000.00 $2,876,000.00 $2,743,500.00 $3,963,000.00 $3,819,000.00 $4,314,000.00 $3,990,000.00 $2,520,000.00 $2,310,000.00 $1,260,000.00 $6,000,000.00 $0.00 $6,733,500.00 $6,483,000.00 $6,129,000.00 $11,574,000.00 -$6,973,500.00 -$490,500.00 $5,638,500.00 $17,212,500.00 Project C 2 $90.00 $65.00 540000 $48,600,000.00 $35,100,000.00 3 4 5 6 $90.00 $90.00 $90.00 $90.00 $65.00 $65.00 $65.00 $65.00 630000 720000 720000 540000 $56,700,000.00 $64,800,000.00 $64,800,000.00 $48,600,000.00 $40,950,000.00 $46,800,000.00 $46,800,000.00 $35,100,000.00 $5,000,000.00 $8,000,000.00 $500,000.00 $200,000.00 $300,000.00 $8,000,000.00 $8,300,000.00 -$16,950,000.00 $5,000,000.00 $5,000,000.00 $5,000,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $6,000,000.00 $10,000,000.00 $10,250,000.00 $2,400,000.00 $4,000,000.00 $4,100,000.00 $3,600,000.00 $6,000,000.00 $6,150,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $8,350,000.00 -$8,600,000.00 $9,000,000.00 $400,000.00 as low IRR, thus the project should not be accepted g with required rate return on the project, even with the decrease in his project fulfills the capital expenditure and should be selected $5,000,000.00 $1,500,000.00 $7,000,000.00 $2,800,000.00 $4,200,000.00 $1,500,000.00 $6,000,000.00 $3,000,000.00 $8,900,000.00 $14,700,000.00 $9,300,000.00 $24,000,000.00