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Jennifer executive board has asked you to change the decision-(Answered)

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Jennifer executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided.

Requirements:

1. Determine the new target weighted average cost of capital for Jennifer, given following assumptions:

Weights of 70% debt and 30% common equity (no preferred equity); this essentially reverses their previously calculated capital structure

A 35% tax rate

The cost of debt is now 10% due to an additional default risk premium

The beta of the company is 1.3

The risk free rate is 2%

The return on the market is 12%


Use the CAPM for calculation of the cost of equity.

2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:

Initial investment outlay of $25 million, comprised of $20 million for machinery with $2 million for net working capital for metal inventory and $3 million for crystals

Project and equipment life is 5 years

Revenues are expected to increase $25 million annually

Gross margin percentage is 40% (not including depreciation)

Depreciation is computed at the straight-line rate for tax purposes

Selling, general, and administrative expenses are 5% of sales

Tax rate is 35%


Compute net present value and internal rate of return of the project.

3. Although crystal jewelry is extremely popular at the moment, Jennifer are concerned about the product life cycle and would like to explore an abandonment option. Management asks for an additional scenario to be developed, reflecting a three- rather than a five-year life cycle for this project, including cash flows and asset life. Compute the net present value and internal rate of return given this change in parameter.


You may use Excel to complete this project. The text has a number of resources that provide examples of spreadsheet solutions for this purpose. Model your responses according to these examples.

Additionally, provide a 250?500 word executive summary on the results of the decision rule given these two scenarios with a five- and three-year project life, and revised WACC. Advise Felicia & Fred specifically regarding the abandonment option versus the initial five year project.

For additional details, please refer to the Short Paper/Case Study Rubric document in the Assignment Guidelines and Rubrics section of the course.



 


 

Jennifer executive board has asked you to change the decision

 

model previously completed to reflect the following changes

 

regarding increased leverage, WACC, and cash flows. It is your

 

job to calculate the decision rules for NPV and IRR given the

 

information provided.

 

Requirements:

 


 


 


 


 


 


 


 


 


 

1. Determine the new target weighted average cost of capital

 

for Jennifer, given following assumptions:

 

Weights of 70% debt and 30% common equity (no preferred

 

equity); this essentially reverses their previously calculated

 

capital structure

 

A 35% tax rate

 

The cost of debt is now 10% due to an additional default risk

 

premium

 

The beta of the company is 1.3

 

The risk free rate is 2%

 

The return on the market is 12%

 

Use the CAPM for calculation of the cost of equity.

 


 


 


 


 


 


 


 


 


 


 

2. Calculate the cash flows for the new crystal jewelry project

 

given the following assumptions:

 

Initial investment outlay of $25 million, comprised of $20 million

 

for machinery with $2 million for net working capital for metal

 

inventory and $3 million for crystals

 

Project and equipment life is 5 years

 

Revenues are expected to increase $25 million annually

 

Gross margin percentage is 40% (not including depreciation)

 

Depreciation is computed at the straight-line rate for tax

 

purposes

 

Selling, general, and administrative expenses are 5% of sales

 

Tax rate is 35%

 

Compute net present value and internal rate of return of the

 

project.

 

3. Although crystal jewelry is extremely popular at the moment,

 

Jennifer are concerned about the product life cycle and would

 

like to explore an abandonment option. Management asks for

 

an additional scenario to be developed, reflecting a three-

 


 

rather than a five-year life cycle for this project, including cash

 

flows and asset life. Compute the net present value and

 

internal rate of return given this change in parameter.

 

You may use Excel to complete this project. The text has a

 

number of resources that provide examples of spreadsheet

 

solutions for this purpose. Model your responses according to

 

these examples.

 

Additionally, provide a 250?500 word executive summary on

 

the results of the decision rule given these two scenarios with a

 

five- and three-year project life, and revised WACC. Advise

 

Felicia & Fred specifically regarding the abandonment option

 

versus the initial five year project.

 

For additional details, please refer to the Short Paper/Case

 

Study Rubric document in the Assignment Guidelines and

 

Rubrics section of the course.

 


 

 

Paper#9210262 | Written in 27-Jul-2016

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