Question #1: WACC & Capital Budget Analysis

Based on the inputs below prepare a capital budget analysis for this Base Case using the Net Present Value, Internal Rate of Return, Profitability Index and Payback in years methods, determining whether the project is feasible. Please show your spreadsheet calculations and your final determinations of go or no go on the project. Use your Investment Return Analysis as an example for this capital budget analysis.

Project Inputs:

WACC Debt is 65% and Equity is 35% of this firms capital structure. Interest rate on the debt is 7.5%, firms tax rate is 22%. Firms beta is 1.40, Risk Free Rate is 0.82%, Market Return Rate is 8.0%.

Project Investment Outlay, Year 0 - $1,000,000

Project Investment Life 10 years

Project Depreciation - $100,000 / year

Project Salvage Value - $30,000

Working Capital Base of Annual Sales 10%

Expected inflation rate per year 3.0%

Project Tax Rate 30%

Units sold per year 40,000

Selling Price per Unit, Year 1 - $40.00

Fixed operating costs per year excluding depreciation - $175,000

Manufacturing (Variable) costs per unit, Year 1 - $30.00