I need to explain the analysis, may be on how price sensitive/ volume sensitive of each investment. Also just explaining it all together.

APPENDIX B: CAPITAL BUDGETING GROUP PRESENTATION ACMC 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 three mutually exclusive projects under consideration, and it might decide which project should receive the investment funds for this year. As part of the financial analysis team, it is up to you to determine the appropriate valuation of each project. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm. Do remember that management has a preference in using the market values of the firm?s capital structure and believes it current structure is optimal. BALANCE SHEET Cash 2,000,000 Accounts Payable and Accruals 18,000,000 Accounts Receivable 28,000,000 Notes Payable 40,000,000 Inventories 42,000,000 Long-Term Debt 60,000,000 Preferred Stock 10,000,000 Net Fixed Assets 133,000,000 Common Equity 77,000,000 Total Assets 205,000,000 Total Claims 205,000,000 Market Values of Capital * 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. * You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost. * The company has 5 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with flotation costs, including market pressure, of 15 percent. * The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stock?s beta is 1.22. * Your firm does not use notes payable for long-term financing. * Your firm?s federal + state marginal tax rate is 40%. Project A: This project requires an initial investment of $20,000,000 in equipment which will cost an additional $3,000,000 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 raw goods inventory by $5,000,000, but it will also see an increase in accounts payable for $1,500,000. With this investment, the project will last 6 years at which time the market value for the equipment will be $1,000,000. 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. It is estimated the sales volume for this project will be 700,000 in year 1, 1,000,000 in year 2, 650,000 in year 3, 700,000 in year 4, 650,000 in year 5 and 550,000 in year 6. The fixed costs would be $2,000,000 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. Project B: This project requires an initial investment of $20,000,000 in equipment which will require additional expense of $1,000,000 to install in the current facility. Consistent with other projects, the equipment will be depreciated using the MACRS Investment Class schedule. Once installed, the firm will need to increase inventory by $6,000,000. The project will last 6 years, but at the end of that period, the equipment will have no salvage value. During the operational period of this project, the product produced will sell for $6.50 per unit. The costs related to this product will be $4.00 per unit in variable cost and the fixed costs each year will be $1,000,000. Management has estimated that the sales volume for this project will be 3,500,000 in year 1, 4,000,000 in year 2, 4,250,000 in year 3, 4,500,000 in year 4, 4,300,000 in year 5, and 4,200,000 in year 6. Since the project has been brought under consideration through the normal channels, a discount rate equal to the WACC should be used in the project valuation. Project C: The project is outside of the normal products sold of the firm. The project is a reconsideration of a project proposed two years ago by a former manager. At that time a marketing study costing $200,000 was done; however, the project was not undertaken. Now the firm needs to consider if this project is worth the firm?s capital investment dollars. This project would require investment in equipment of $20,000,000 with an additional cost of $5,000,000 in installation fees. The project will be considered under a 6 year project cycle, but would be depreciated under the 5 year MACRS schedule. At the end of the project, management estimates that the equipment could be sold at a market value of $5,000,000. This project also creates a need to increase raw goods inventory by $6,000,000. During the operational cycle of this project, the product would have a sales price of $90.00 per unit. Costs associated with this project would be $65.00 in variable cost per unit and a fixed cost per year of $5,000,000. Management estimates that the sales volume would be 500,000 units in year 1, 600,000 units in year 2, 700,000 units in year 3, 800,000 units in year 4, 800,000 units in year 5, and 600,000 units in year 6. Because management is uneasy with undertaking a project so far outside of its normal product portfolio, it is imposing a 3 percentage point premium above the WACC as the required rate of return on the project. Modified Accelerated Cost Recovery System (MACRS) Ownership Year 5-Year Investment Class Depreciation Schedule 1 20% 2 32% 3 19% 4 12% 5 11% 6 6% Total = 100% Requirements 1. Find the costs of the individual capital components: a. long-term debt (before tax and after tax) b. preferred stock c. average cost of retained earnings (avg. of CAPM and DCF) 2. Determine the target percentages for the optimal capital structure, and then compute the WACC. (Carry weights to four decimal places. For example: 0.2973 or 29.73%) 3. Create a valuation spreadsheet for each of the projects mentioned above. Evaluate each project according to the following valuation methods: a. Net Present Value of Discounted Cash Flow b. Internal Rate of Return c. Payback Period d. Profitability Index 4. Identify the sensitivity of the projects related to a 10% reduction in price and a 10% reduction in sales volume. 5. Provide a synopsis evaluation of each project and provide a recommendation of which project management will accept for its capital expenditures budget for the upcoming year.

Capital Budgeting Group Presentation 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 5000000 14 10% 0.8 15% Risk free rate Rate of return Beta 6% 14% 1.22 Using dividend growth model: Required rate of return = D1 + Current price - floatation cost = 0.88 11.9 = growth + 10% 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 Total value Weights Debt 60000 874.78 52486800 39.92% Preferred Stock 100000 90 9000000 6.84% Equity 5000000 14 70000000 53.24% Total 131486800 100.00% 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 preferred stock 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 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 $3,000,000.00 $3,500,000.00 2 $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 $240,000.00 $4,600,000.00 -$26,500,000.00 -$26,500,000.00 1 $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 $384,000.00 $7,360,000.00 $4,840,000.00 -$21,660,000.00 $7,744,000.00 -$13,916,000.00 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 $78,000.00 $1,344,000.00 $1,182,000.00 $1,272,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 $1,380,000.00 $3,500,000.00 $600,000.00 $4,448,000.00 $4,104,000.00 $3,712,000.00 $6,752,000.00 -$9,468,000.00 -$5,364,000.00 -$1,652,000.00 $5,100,000.00 -$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 2 $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 1 $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 $6,330,000.00 -$20,670,000.00 $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 $20,925,000.00 17.78% 4.29 1.78 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 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 $5,000,000.00 $6,000,000.00 2 $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 -$31,000,000.00 -$31,000,000.00 1 $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 $6,500,000.00 -$24,500,000.00 $9,200,000.00 -$15,300,000.00 3 4 5 6 $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 NPV = IRR = Payback period = Profitability index = -$26,755,517.49 20.51% 4.08 0.14 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 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 $3,000,000.00 $3,500,000.00 2 $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 $4,600,000.00 -$26,500,000.00 -$26,500,000.00 1 $4,000,000.00 -$22,500,000.00 3 4 5 6 $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 $7,360,000.00 $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 $4,370,000.00 $2,760,000.00 $2,530,000.00 $6,544,000.00 -$15,956,000.00 $3,668,000.00 $3,264,000.00 $2,932,000.00 -$12,288,000.00 -$9,024,000.00 -$6,092,000.00 $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 $1,380,000.00 $3,500,000.00 $600,000.00 $6,092,000.00 $0.00 $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 2 $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 1 $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 $4,965,000.00 -$22,035,000.00 $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 $11,272,500.00 10.02% 4.93 1.42 Project C Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product 0 $20,000,000.00 $5,000,000.00 $6,000,000.00 1 2 3 4 5 6 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 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 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 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = 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 $3,800,000.00 -$27,200,000.00 $5,960,000.00 -$21,240,000.00 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 -$27,706,488.13 6.26% 5.32 0.11 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 NPV = IRR = Payback period = Profitability index = 0 $20,000,000.00 $3,000,000.00 $3,500,000.00 2 $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 1 $4,420,000.00 -$22,080,000.00 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 $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 $17,212,500.00 14.87% 4.51 1.64 2 $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 1 $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 $5,805,000.00 -$21,195,000.00 $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 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 $5,000,000.00 $6,000,000.00 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = 1 2 $90.00 $65.00 450000 $40,500,000.00 $29,250,000.00 $5,000,000.00 $5,000,000.00 $1,250,000.00 $500,000.00 $750,000.00 $5,000,000.00 $90.00 $65.00 540000 $48,600,000.00 $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 $5,750,000.00 -$25,250,000.00 $8,300,000.00 -$16,950,000.00 3 -$26,872,276.12 16.76% 4.37 0.13 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 $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 $6,000,000.00 $10,000,000.00 $10,250,000.00 $7,000,000.00 $2,400,000.00 $4,000,000.00 $4,100,000.00 $2,800,000.00 $3,600,000.00 $6,000,000.00 $6,150,000.00 $4,200,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $1,500,000.00 $6,000,000.00 $3,000,000.00 $8,350,000.00 $9,000,000.00 $8,900,000.00 $14,700,000.00 -$8,600,000.00 $400,000.00 $9,300,000.00 $24,000,000.00 Synopsis Project A Considering project A, we can say that project provides negative NPV as well as low IRR, thus the project should not be accepted Project B Considering project B, we can say that the project provides positive NPV along with required rate return on the project, even with the decrease in the sales price and volume, the project will be providing positive return, thus this project fulfills the capital expenditure and should be selected Project C Project C has the hightest negative NPV and thus is not an acceptable project 4 Capital Budgeting Group Presentation 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 5000000 14 10% 0.8 15% Risk free rate Rate of return Beta 6% 14% 1.22 Using dividend growth model: Required rate of return = D1 + Current price - floatation cost = 0.88 11.9 = growth + 10% 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 Total value Weights Debt 60000 874.78 52486800 39.92% Preferred Stock 100000 90 9000000 6.84% Equity 5000000 14 70000000 53.24% Total 131486800 100.00% 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 preferred stock 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 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 $3,000,000.00 $3,500,000.00 2 $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 $240,000.00 $4,600,000.00 -$26,500,000.00 -$26,500,000.00 1 $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 $384,000.00 $7,360,000.00 $4,840,000.00 -$21,660,000.00 $7,744,000.00 -$13,916,000.00 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 $78,000.00 $1,344,000.00 $1,182,000.00 $1,272,000.00 $4,370,000.00 $2,760,000.00 $2,530,000.00 $1,380,000.00 $3,500,000.00 $600,000.00 $4,448,000.00 $4,104,000.00 $3,712,000.00 $6,752,000.00 -$9,468,000.00 -$5,364,000.00 -$1,652,000.00 $5,100,000.00 -$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 2 $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 1 $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 $6,330,000.00 -$20,670,000.00 $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 $20,925,000.00 17.78% 4.29 1.78 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 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 $5,000,000.00 $6,000,000.00 2 $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 -$31,000,000.00 -$31,000,000.00 1 $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 $6,500,000.00 -$24,500,000.00 $9,200,000.00 -$15,300,000.00 3 4 5 6 $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 NPV = IRR = Payback period = Profitability index = -$26,755,517.49 20.51% 4.08 0.14 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 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 $3,000,000.00 $3,500,000.00 2 $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 $4,600,000.00 -$26,500,000.00 -$26,500,000.00 1 $4,000,000.00 -$22,500,000.00 3 4 5 6 $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 $7,360,000.00 $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 $4,370,000.00 $2,760,000.00 $2,530,000.00 $6,544,000.00 -$15,956,000.00 $3,668,000.00 $3,264,000.00 $2,932,000.00 -$12,288,000.00 -$9,024,000.00 -$6,092,000.00 $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 $1,380,000.00 $3,500,000.00 $600,000.00 $6,092,000.00 $0.00 $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 2 $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 1 $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 $4,965,000.00 -$22,035,000.00 $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 $11,272,500.00 10.02% 4.93 1.42 Project C Year Initial investment Installation cost Change in Working capital Sale price of the product Variable cost of the product 0 $20,000,000.00 $5,000,000.00 $6,000,000.00 1 2 3 4 5 6 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 $81.00 $65.00 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 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 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = 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 $3,800,000.00 -$27,200,000.00 $5,960,000.00 -$21,240,000.00 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 -$27,706,488.13 6.26% 5.32 0.11 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 NPV = IRR = Payback period = Profitability index = 0 $20,000,000.00 $3,000,000.00 $3,500,000.00 2 $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 1 $4,420,000.00 -$22,080,000.00 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 $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 $17,212,500.00 14.87% 4.51 1.64 2 $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 1 $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 $5,805,000.00 -$21,195,000.00 $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 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 $5,000,000.00 $6,000,000.00 -$31,000,000.00 -$31,000,000.00 NPV = IRR = Payback period = Profitability index = 1 2 $90.00 $65.00 450000 $40,500,000.00 $29,250,000.00 $5,000,000.00 $5,000,000.00 $1,250,000.00 $500,000.00 $750,000.00 $5,000,000.00 $90.00 $65.00 540000 $48,600,000.00 $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 $5,750,000.00 -$25,250,000.00 $8,300,000.00 -$16,950,000.00 3 -$26,872,276.12 16.76% 4.37 0.13 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 $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 $6,000,000.00 $10,000,000.00 $10,250,000.00 $7,000,000.00 $2,400,000.00 $4,000,000.00 $4,100,000.00 $2,800,000.00 $3,600,000.00 $6,000,000.00 $6,150,000.00 $4,200,000.00 $4,750,000.00 $3,000,000.00 $2,750,000.00 $1,500,000.00 $6,000,000.00 $3,000,000.00 $8,350,000.00 $9,000,000.00 $8,900,000.00 $14,700,000.00 -$8,600,000.00 $400,000.00 $9,300,000.00 $24,000,000.00 Synopsis Project A Considering project A, we can say that project provides negative NPV as well as low IRR, thus the project should not be accepted Project B Considering project B, we can say that the project provides positive NPV along with required rate return on the project, even with the decrease in the sales price and volume, the project will be providing positive return, thus this project fulfills the capital expenditure and should be selected Project C Project C has the hightest negative NPV and thus is not an acceptable project 4