read theSSRNcase study titled Caterpillar, Inc.: The Impact of Decision Biases and Risk on Capital Budgeting, which analyzes the Caterpillar organization and the impact of emerging markets on capital investment decisions.

Caterpillar is expanding to foreign markets with the introduction of their new hybrid/electric exoloader. Using Caterpillar's capital expenditure model (CapX), you will evaluate two scenarios:

• Scenario A: Expanding and refocusing an existing production facility in Aurora, IL
• Scenario B: Building a new facility in China

In this short paper, you will closely examine the alternative models available to decision makers, and answer the questions listed in the rubric document.

Download 2019 December financial statement (10-K) for Caterpillar (CAT). You can use SEC Edgar Company Filings.

II. Using the financial statements,

determine the discount rate and calculate WACC. In order to do that, you need to calculate:

A. Cost of debt

B. Cost of equity: Think CAPM (Capital Asset Pricing Model) or SLM (Security Market Line).

C. Can Caterpillar use preferred stock financing? (Analyze financial statements and answer yes or no; explain how you arrived at your answer.)

Helpful hints for this step:

Use the ValuePro website to obtain an approximate estimation of WACC for Caterpillar.

You can use Calculating Weighted Average Cost of Capital (WACC) or other YouTube videos as a guide on how to calculate WACC using financial statements.

An optional article in Module Five, Understanding Weighted Average Cost of Capital: A Pedagogical Application, also provides a WACC calculation guide

III. Risk Analysis:

Read items 1A (Risk Factors) and 7 (Management's Discussion and Analysis of Financial Condition and Results of Operations) in the 10-K financial statements. Then, address the following:

A. How would these risk factors impact the two projects?

B. Consider the risk factors and calculate each project's risk-adjusted hurdle rate: i. Scenario

A: Is the risk-adjusted hurdle rate higher or lower than the WACC? ii.

Scenario B: Is the risk-adjusted hurdle rate higher or lower than the WACC?

C. How would you mitigate the risks?