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

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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.


g,
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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