Your represents the capital budgeting committee of a successful firm. You

have been invited to the next Board of Directors meeting to present your analysis and

recommendation on a new capital project. Your presentation should contain the

following:

1. Brief description of the proposed capital project

2. Estimation of the incremental cash flows related to the project

3. Estimation of the weighted average cost of capital

4. Financial evaluation of capital budget project (using NPV or IRR)

5. Recommendation to the Board of Directors on whether or not to proceed with the

proposed capital project.

A written summary should accompany your presentation. The written summary

should be no more than five (5) pages, including exhibits.

Your presentation should be no more than 20 minutes in length. You may use

whatever means necessary to convey your analysis and recommendation.

You may choose to use a recognized publicly held firm or a fictitious entity. Please

use the following information as a guide to your analysis:

1. Target capital ratio: % of debt and % of equity

2. Beta coefficient

3. Risk-free rate is equal to the current level of a point on the Treasury yield

curve.

4. The market risk premium is equal to 5%

5. Corporate tax rate is 35%

6. All cash flows related to the project are positive (except the initial

expenditure)

7. Useful product life

8. "Straight-line" depreciation method

Use:

The WACC model is that four step process:

1. Determining the proportions of debt and equity
2. Determine the cost of debt (Kd x (1- tax rate))
3. Deterrmine the cost of equity (using CAPM formula)
4. Determining the weighted average cost of capital (WACC) using the formula: WACC = Kd (1-tax rate)(% debt) + Ke(% equity).