# Capital Budgeting Concepts – Phase 5

Question description

Word document in APA style + references of 700–1,000 words with attached Excel Spreadsheet showing calculationsBe sure to document your paper with in-text citations, credible sources, and list of references used in proper APA format.
(Individual or Group Projects) will be due by Monday, and late submissions
will be assigned a late penalty in accordance with the late penalty policy
found in the syllabus. NOTE: All submission-posting times are based on
midnight Central Time.
Key Assignment
financial management intern is to apply the knowledge that you acquired while
engaging in the cost of capital and capital budgeting discussion you had with
your colleagues. In this task, you will be evaluating a capital project using
the weighted cost of capital for a firm using the market value rather than
the book value of the components and the capital budgeting techniques
presented in this phase.
First, recalculate the
weighted average cost of capital (WACC) using the market value of equity to
determine are more realistic cost of capital. You will need to visit a Web
site to get the current value of the common stock price per share and
multiply this value times the most recent number of shares of common stock
outstanding. In this exercise, you will be ignoring preferred stock because its
weight value will most likely be too low to impact the final result. You may
use the following table to complete this portion of the task:

Company

Common
Stock, price per share

Number
of Common Shares Outstanding

Market
Value of Common Equity

Now, you can estimate the
total market value of the company by adding the book value of total
liabilities to the market value of the firm’s common equity and determine
their market value weights.

Company

Total
Liabilities

Market
Value of Common Equity

Market
Value of the Firm

Values

Weights

Using the cost of each
component as determined in the Phase 4 IP, calculate the firm’s market value
WACC.

After-Tax
Cost of Debt

Cost
of Common Equity

WACC

Unweighted
Cost

Market
Weight of Component

Market
Weighted Cost of Component

The firm is considering
investing in a capital project that will have an initial cost of \$12
million. The project is expected to have a productive life of 5 years,
and at the end of this period, it is expected to have a salvage value of \$2
million. The net value of the project will be depreciated using the
straight-line method for the full 5 years. The project is expected to
increase the firm’s revenue by \$10 million per year, and related expenses
(not including depreciation) are expected to increase by about \$6.5
million per year.
The first thing you need to
do is calculate the annual depreciation. Feel free to use the following
table:

Initial Investment

less Salvage Value

Depreciable Value

Life of Project
(years)

Depreciation/year

Now, you need to calculate
the relevant cash flows for the project. You can use the average tax rate
that was calculated in Phase 4 to determine the additional taxes the firm
will have to pay. The following template may be of some assistance to you:

Years

0

1

2

3

4

5

Initial Investment
(negative)

Increase in
Revenue

Less Increase in
Operating Expenses

Increase in
Operating Income

Less
Depreciation/year

Taxable Income

Less Taxes at
Average Rate

Net Income

Plus
Depreciation/year

Operating Cash
Flow

Plus Salvage Value
(Year 5)

Relevant Cash
Flows (0–5)

At this point, you are
ready to apply the capital budgeting techniques of net present value (NPV)
and the internal rate of return (IRR). To calculate the NPV, use the
market-value WACC as your discount rate and the required rate of return for
IRR.
•
After completing the required
calculations, explain your results in a Word document, and attach the
◦
Based on your calculations, would you
recommend approving or rejecting the project, and why?
◦
Why would you expect both NPV and IRR
to support the same conclusion to accept or reject the project?
◦
If you employed a cost of capital of
20%, would you have made the same accept or reject decision, and why?
◦
What are some of the advantages and
disadvantages of the 2 methods (NPV and IRR), and under what circumstances is
one more reliable over the other?
◦
Why is operating cash flow used in
capital budgeting and not net income?
Be sure to document your
paper with in-text citations, credible sources, and list of references used
in proper APA format.

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