Since last year, Clear View Energy Systems has divided its different product lines into separate divisions for accounting purposes. There are now four divisions consisting of the window film business, the vehicle film business, the roof film business, and the recently launched aerospace film business which produces solar film coatings for NASA, commercial satellites, and the growing aerospace industry (including companies such as SpaceX, Blue Origin, and Arianespace).

Its budget time again and the various division managers have brought their proposals for next years capital spending program. Your job is to evaluate these proposals from a financial perspective and determine which projects meet the companys criteria for investment.

Additional information: Based on your findings and suggestions regarding management of the companys weighted average cost of capital, the company has decided to increase slightly its use of (less expensive) debt financing. The result is that the companys new WACC is now approximately 10%.

However, you feel that the various divisions have different risk profiles, given their dependencies are very different industries. The window film business depends on both the commercial and residential construction industries, as well as the home improvement market; the vehicle film business depends on the automobile industry, the roof film business depends on the residential construction industry, but also on the energy (utilities) industry, as some some of the major projects for this division involve joint ventures with local and regional utilities companies; and the aerospace film business depends on the ups and downs of the aerospace industry and the political influences that affect NASAs budgets and projects. These dependencies can cause the revenues (and profitability) for these divisions to fluctuate significantly over time, so you propose to use different discount values for evaluating the various divisional projects.

The construction industries (both residencial and commercial) are now recovering fairly smoothly from the earlier recession of 2008-2009, so you feel comfortable applying a discount rate to the window film division of 10%, which is equal to the companys WACC. The automobile industry, though fairly robust, is still volatile. The level of vehicle sales has been fluctuating from year to year and this affects the vehicle film divisions sales, so you feel obliged to add a few percentage points to this divisions discount rate, to factor in this risk. The vehicle film division will use a 12% discount rate. The roof film division will utilize an 11% discount rate as it has a slightly higher risk than the window film businessdue to the dependency on the utility companies, and their somewhat fickle support for energy saving projects. The aerospace business is perhaps the most risky due to the political nature of NASA budgets and the wild swings in that industry. The aerospace division will use a discount rate of 15% (which includes a 5% risk adjustment over the companys WACC).

Proposal #1: The window film business is proposing to invest in some new production machinery that will save roughly $300,000 per year (EBT) over the 10-year productive life of this equipment. The cost of the equipment is estimated to be $2,260,000, and it will be depreciated using the straight-line method over its 10-year life. The tax rate = 35%.

Proposal #2: The vehicle film business proposes to invest in a new product that can be used with hybrid vehicles to directly hook up to the vehicles battery to help extend the time between required recharges. The cost to implement the corresponding production line and start-up costs for launching the product are estimated to be $2,800,000. The additional sales that this project would likely generate over the next 7 years (the estimated life of the product before becoming obsolete) are as follows:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
2,500,000	3,250,000	4,250,000	6,000,000	9,000,000	12,000,000	10,000,000

The expected operating profit (EBT) for this product line is 7%. The tax rate for the company is 35%. The depreciation that corresponds to this product line would be approximately $400,000 each year over this seven year period.

(Hint: You should use an Excel spreadsheet to solve for the IRR and the NPV of this project, as the cash flows are different each year.)

Proposal #3: The roof film division proposes to invest in modifications to its residential roof tiles product being sold in the southwestern US states, especially in California and Arizona. These modifications would bring the product specifications (and more importantly, the hazardous waste disposal processes used in its manufacture) in line with new environmental standards likely to be implemented in California should a proposed referendum be approved by voters in the fall. The company currently produces these tiles in California, in a plant they acquired last year. They have not had problems to date with meeting the states stringent enviromentat regulations, but these regualations evolve over time, and failure to meet future standards could affect the potential to produce and/or sell the products in that state.

The investment in new processing equipment would cost about $481,000 but is expected to produce cost savings of around $50,000 per year (EBT) for the next 10 years. The company will used straight-line depreciation over the 10-year life of this equipment. The tax rate is 35%.

Proposal #4: The aerospace film division is proposing investment in a new variation of its product which could be used on the international space station and on commercial satellites, including a new system of telecommunications satellites that Virgin Satellite is planning to launch in the next few years, if it receives permission from the Federal Communciations Commission (FCC) for this new system. The space station deal also includes some risk as the various countries involved must approve the components used on the joint station. Michael Yoder, the division manager estimates that theres a 75% chance of success for each of the two major deals. However, even if both deals fell through there would still be some residual sales to other satellite projects (the residual sales will happen in any scenario). The potential sales for this product over the next seven years, if all goes well, are as follows:

	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
Virgin Satellite	1,000,000	1,500,000	2,000,000	3,000,000	3,250,000	3,250,000	3,250,000
Space Station	900,000	1,200,000	1,800,000	2,400,000	2,700,000	2,700,000	2,700,000
Residual Sales	750,000	1,000,000	1,500,000	2,000,000	2,250,000	2,250,000	2,250,000

Michael estimates that the operating profit margin (EBT) would be a whopping 12% on this lucrative business. The initial investment required for this project would be $2,975,000. The yearly depreciation associated with this investment would be $425,000 per year over this period. (The tax rate of course is 35%).

Your teams assignemnt is as follows:

Calculate the IRR and NPV for each of these proposals. Are there any other criteria that should be included in the decision-making process?

If access to funding was not an issue, which project(s) would you recommend for inclusion in next years budget? Why?

If CVES had limited access to capital for these projectslets say they only had $4,000,000 in available capitalwhich project(s) would you choose, and why?

If CVES used the same discount rate for each division (in this case, its WACC), how would this affect your selection of projects?