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 30,000 40,000 50,000 60,000 70,000 80,000

Scenario Analysis (Price) -- (10% 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) Internal Rate of Return 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.

Bonds	60,000	Preferred Stock		Common Stock
Periods left until Maturity	15 years	Stock Par Value	$ 100.00	Current market price per share	$ 17.00
Coupon Rate	10%	Dividend Per Share	$ 9.00	Last Dividend paid	$ 0.65
Semiannual Payment	$ 50.00	Current market price per share	$ 90.00	Dividend Growth Rate	10%
Current Price	$ 874.78			Risk free rate	6%
Face Value	$ 1,000.00			Stock market return	13%
				Firm's Beta	1.22
Tax Rate	40.0%			Cost of Equity: CAPM Method	14.54%
Cost of Debt (BT)	11.80%	Cost of Preferred Stock		Cost of Equity: DDM Method	14.21%
				Cost of Common Equity (Avg)	14.38%
	Market Values	Market Weights
Total Bonds	$ 52,486,800	0.36%		Weighted Average Cost of Capital	11.50%
Total Preferred Stock	$ 85,000,000	0.58%
Total Common Stock	$ 9,000,000	0.06%
Total Firm Value	$ 146,486,800	1

ORIGINAL SCENARIO
Initial Cost	$ 2,000,000	Price	$ 30.00	Tax Rate	40%
Installation Cost	$ 50,000	Variable Cost	$ 10.00	Required Return	0.00%
Increase in NWC	$ 120,000	Fixed Cost	$ 100,000
Salvage Value	$ 200,000
		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Units sold		30,000	40,000	50,000	60,000	70,000	80,000
Depreciation Rate		20.0%	32.0%	19.0%	12.0%	11.0%	6.0%
Years		1	2	3	4	5	6
Sales		$30,000	$40,000	$50,000	$60,000	$70,000	$80,000
Variable Cost		$300,000	$400,000	$500,000	$600,000	$700,000	$800,000
Fixed Cost		$100,000	$100,000	$100,000	$100,000	$100,000	$100,000
EBITDA		$500,000	$700,000	$900,000	$1,100,000	$1,300,000	$1,500,000
Depreciation		$410,000	$656,000	$361,000	$228,000	$209,000	$116,000
EBIT		$90,000	$44,000	$539,000	$872,000	$1,091,000	$1,384,000
Tax Expense		($128,000)	($244,800)	$71,200	$257,600	$352,800	$507,200
Net Income		$192,000	($367,200)	$106,800	$386,400	$529,200	$760,800
	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Operating Cash Flow		$218,000	$288,800	$467,800	$614,400	$738,200	$876,800
Capital Spending Cash Flow		-2,050,000	0	0	0	0	$200,000
Net Working Capital Cash Flow		-120,000	0	0	0	0	$ -
Total Cash Flows		($1,952,000)	$0	$0	$0	$0	$1,076,800
Total Cumulative Cash Flows		($1,952,000)	$0	$0	$0	$0	$1,076,800
Internal Rate of Return	14.80%		Payback Period	4.20
Net Present Value	$ 1,052,885.00		Profitability Index	0.53
PRICE REDUCTION SCENARIO
Initial Cost		Price		Tax Rate
Installation Cost		Variable Cost		Required Return
Increase in NWC		Fixed Cost
Salvage Value
		Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
Units sold
Depreciation Rate
Years		1	2	3	4	5	6
Sales
Variable Cost
Fixed Cost
EBITDA
Depreciation
EBIT
Tax Expense
Net Income