Please help us complete data for only project A & B.

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 firms 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 stocks beta is 1.22.
5. Your firm only uses bonds for long-term financing.
6. Your firms federal + state marginal tax rate is 40%. (Ignore any carryforward implications)

Depreciation Schedule

Modified Accelerated Cost Recovery System (MACRS)

Ownership Year 1 2 3 4 5 6

5-Year Investment Class Depreciation Schedule 20% 32% 19% 12% 11% 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.

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 firms WACC.

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	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	70,000	100,000	65,000	70,000	65,000	55,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	50,000	60,000	70,000	80,000	90,000	80,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	30,000	40,000	50,000	60,000	70,000	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.

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.

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	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	70,000	100,000	65,000	70,000	65,000	55,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	100,000	90,000	80,000	70,000	60,000	50,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	80,000	80,000	80,000	80,000	80,000	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.

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.

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	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	20,000	50,000	40,000	30,000	20,000	10,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	19,000	45,000	38,000	32,000	18,000	12,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	21,000	55,000	44,000	28,000	25,000	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.

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 firms WACC.

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	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	72,000	95,000	70,000	63,000	61,000	52,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	55,000	65,000	75,000	85,000	95,000	85,000

Years	2014	2015	2016	2017	2018	2019
Forecasted Units Sold	32,000	45,000	48,000	58,000	75,000	90,000