MBA 643 FINAXCIAL MANAGEMENT FINAL PROJECT Applied Manufacturing. Inc. (AM) is a custom metal fabcication corporanon providing a wide rasge of goods and services to its custornets. For decades. AM has been a parts manufacturers such wo Nordan, Bocing, and Aibus, as well as the United Stafes Government in contracts for both military aifcraft and naval vesicls. While the existing lines of businesis are profitable, sanior Insten hip of the sorporation is puiniog for the dependeat on their existing clients. As part of its budpeting process for the secty year, the senior leadership team has identified three mutually-ciclasive projects which meet the stratege goals mentioned performing a finacial analysis of these ptojectiv to determine the apprppriate valuation of each one. However, before you can deternine the appropriale valuations of these. projects, you need to determites the weighted avengec cont of capital for the firm. Senior and believes its current structure is optional. Mirket Values orceapital for 589924 - The company alwo has 150,000 tharrs of 5100 par, 924 dividend perpetaial prefemed alsare. - The risk-free rale is currtadly 6 petceet, and the rate of rethime on the atock market as a whole is 73 percent. Yoar stock's beta is 1.18 . - Your firm does not une notes payble for long-lerm finuncing. - Your ifrm' federal + ataie marginal tax nater in 28s. - For all projects, the ecievestmemt nate shall be 238 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 of $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 produce 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 could use some existing company infrastructure, 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. Requirements 1. Calculate the costs of the individual capital components: a. Before-tax cost of long-term debt b. After-tax cost of long-term debt c. Cost of preferred stock d. Average cost of retained earnings (average of both values below) i. Capital Asset Pricing Model method ii. Dividend Discount Model method 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. Modified Internal Rate of Return d. Payback Period 4. Recommendations: Provide a written synopsis evaluation of each project and provide your recommendation of which of the projects management should accept for its capital expenditures budget for the upcoming year
