Q$3.$ Capital Budgeting Analysis: Project Selection Based on NPV and Profitability Index Scenario $(30$ Points$)$:

As a financial analyst for Greenwood Corporation, you have been assigned to assess the viability of two potential projects, Project Alpha and Project Beta. Both projects have an expected lifespan of $5$ years and will involve initial capital expenditures, changes in net working capital, and operational revenues and costs. Your task is to calculate the Net Present Value $($NPV$)$ and Profitability Index $($PI$)$ for each project and provide a recommendation. You are also required to explain under what circumstances the PI should be preferred over the NPV for project selection.

Project Financials:

$$ Project Alpha:

$$ Initial Capital Expenditure $($CapEx$)$: $$400,000$

$$ Annual Revenue: $$200,000$

$$ Annual Operational Cost $($excluding depreciation$)$: $$100,000$

$$ Inventory Changes: $+$$$20,000$ in Year $0,$ fully recoverable in Year $5$

$$ Accounts Receivable Changes: $+$$$10,000$ in Year $0,$ fully recoverable in Year $5$

$$ Accounts Payable Changes: $+$$$5,000$ in Year $0,$ fully repayable in Year $5$

$$ Project Beta:

$$ Initial Capital Expenditure $($CapEx$)$: $$600,000$

$$ Annual Revenue: $$300,000$

$$ Annual Operational Cost $($excluding depreciation$)$: $$150,000$

$$ Inventory Changes: $+$$$30,000$ in Year $0,$ fully recoverable in Year $5$

$$ Accounts Receivable Changes: $+$$$15,000$ in Year $0,$ fully recoverable in Year $5$

$$ Accounts Payable Changes: $+$$$10,000$ in Year $0,$ fully repayable in Year $5$

Capital Structure:

Greenwood Corporation capital structure is as follows preferred shares $(20\%),$ common equity $(50\%),$ and bonds $(30\%).$

$$ Preferred Shares:

$$ Annual dividend: $$4$ per share

$$ Current price: $$40$ per share

$$ Common Equity:

$$ Risk$-$free rate $($Rf$)$: $2\%$

$$ Market return $($Rm$)$: $7\%$

$$ Beta $(\backslash$beta $)$ of Greenwood Corporation: $1\mathrm{.}3$

$$ Bonds:

$$ Face value: $$1,000$

$$ Coupon rate: $4\%($annual payments$)$

$$ Years to maturity: $10$

$$ Current market price: $$920$

Task:

Part A: Cost Calculations $(6$ Points$)$

$1.$ Calculate the cost of preferred shares using the dividend discount model.

$2.$ Determine the cost of common equity using the Capital Asset Pricing Model $($CAPM$).$

$3.$ Estimate the yield to maturity $($YTM$)$ for the bonds to find the cost of debt.

Part B: WACC Calculation $(4$ Points$)$

Calculate the Weighted Average Cost of Capital $($WACC$)$ for Greenwood Corporation.

Part C: Cash Flow Estimation and Project Evaluation $(10$ Points$)$

$1.$ Estimate the annual cash flows for each project, considering operational cash flows, depreciation $($straight$-$line$),$ and changes in net working capital.

$2.$ Calculate the NPV and PI for each project using the WACC.

$3.$ Calculate the IRR of each project.

$4.$ Provide a recommendation on which project to choose based on NPV and PI criteria.

$5.$ Explain under what circumstances the PI decision rule should be used over the NPV rule.

Part D: $(10$ Points$)$

$$ Present your recommendation in a brief video presentation $(3-6$ minutes$)$ mp$4$ file. In the video, you must explain your analysis and decision$-$making process:

$$ State and justify all assumptions made during your analysis.

$$ Discuss the implications of your findings and the rationale behind your project recommendation and the choice of measure NPV or PI$.$

$$ Could we rank the project using the IRR? Why$/$Whynot$?$

$$ Discuss how would your analysis change if Project alpha has a lifespan of $5$ years, but project beta has a lifespan of six years? $($No data analysis needed here$)$

$$ You may submit a written report instead of a Video. However, in that case the maximum mark possible for this part will be $5/10$