##### Felicia & Fred's executive board have asked you to complete a-(Answered)

**Description**

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**Question**

Felicia & Fred?s executive board have asked you to complete a decision model for their intended refurbishment of the former mill building. In order to make an appropriate decision, the executive team has provided you with the following information regarding 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 target weighted average cost of capital for Felicia & Fred, given following assumptions: | ||||

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

A 35% tax rate | ||||

The cost of debt is 9% | ||||

The beta of the company is 1.2 | ||||

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 of the project given the following assumptions: | ||||

Initial investment outlay of $60 million, comprised of $50 million for machinery with $10 million for net working capital (metal and gemstone inventory) | ||||

Project and equipment life is five years | ||||

Revenues are expected to increase $50 million annually | ||||

Gross margin percentage is 60% (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 30%, a reduced rate that reflects a tax credit due to the repurpose of the building | ||||

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

Also, provide a 250?500 word executive summary on the results of the decision rule. Would you recommend that Felicia & Fred move forward with this project based on the NPV and IRR rules and outcomes? Why or why not? Consider any qualitative aspects of the decision as well. Provide a response with quantitative details which will be presented for consideration at the next executive board meeting. | ||||

Felicia & Fred?s executive board have asked you to complete a decision model for their intended refurb

Requirements:

1. Determine the target weighted average cost of capital for Felicia & Fred, given following assumption

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

A 35% tax rate

The cost of debt is 9%

The beta of the company is 1.2

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 of the project given the following assumptions:

Initial investment outlay of $60 million, comprised of $50 million for machinery with $

Project and equipment life is five years

Revenues are expected to increase $50 million annually

Gross margin percentage is 60% (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 30%, a reduced rate that reflects a tax credit due to the repurpose of the b

Compute net present value and internal rate of return of the project. You may use Excel to complete th

Also, provide a 250?500 word executive summary on the results of the decision rule. Would you recom

STEP 2

Calculating Weighted Average Cost of Capital

weighted average cost of capital - WACC

Component

Equity

Debt

WACC

Weight

0.70

0.30

Cost

Tax- Deduction

65%

WACC-After Tax

0.00% USE CAPM (capital asset pricing mo

0.00%

0.00% WACC

STEP 3

WACC

0.00%

Year

Sales

Gross Margin

Depreciation

Selling/General

EBT

Tax

Net Income

Add Depreciation

Working Capital

Machine

Net Cash CASH FLOW

PV

STEP 4

Conclusion on the Project

0

1.00

0.60

0.05

0.30

(10,000,000)

(50,000,000)

(60,000,000)

Sales

50,000,000

Working Cap

10,000,000

Capitalized

50,000,000

1

50,000,000

30,000,000

10,000,000

2,500,000

42500000.00

(12,750,000)

29,750,000

(10,000,000)

2

50,000,000

30,000,000

10,000,000

2,500,000

42500000.00

(12,750,000)

29,750,000

(10,000,000)

3

50,000,000

30,000,000

10,000,000

2,500,000

42500000.00

(12,750,000)

29,750,000

(10,000,000)

19,750,000

19,750,000

19,750,000

($60,000,000.00) $19,750,000.00

$19,750,000.00

$19,750,000.00

for their intended refurbishment of the former mill building. In order to make an appropriate decision, the execu

en following assumptions:

ion for machinery with $10 million for net working capital (metal and gemstone inventory)

o the repurpose of the building

use Excel to complete this project. The text has a number of resources that provide examples of spreadsheet so

n rule. Would you recommend that Felicia & Fred move forward with this project based on the NPV and IRR rules

PM (capital asset pricing model)

Depreciation

10,000,000

4

50,000,000

30,000,000

10,000,000

2,500,000

42500000.00

(12,750,000)

29,750,000

(10,000,000)

5

50,000,000

30,000,000

10,000,000

2,500,000

42500000.00

(12,750,000)

29,750,000

(10,000,000)

10,000,000

19,750,000

29,750,000

$19,750,000.00

$29,750,000.00

$48,750,000.00 NPV

22.19% IRR

e decision, the executive team has provided you with the following information regarding WACC and cash flows

es of spreadsheet solutions for this purpose. Model your responses according to these examples.

he NPV and IRR rules and outcomes? Why or why not? Consider any qualitative aspects of the decision as well. P

g WACC and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provi

xamples.

of the decision as well. Provide a response with quantitative details which will be presented for consideration at

en the information provided.

ted for consideration at the next executive board meeting.

Paper#9210846 | Written in 27-Jul-2016

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