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You will assume that you still work as a financial analyst for AirJet Best Parts,




Introduction;You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company;is considering a capital investment in a new machine and you are in charge of making a;recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2);the firms cost of capital (Task 5).;Task 4. Capital Budgeting for a New Machine;A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a;new machine that will increase the production of a special component significantly. The;anticipated cash flows for the project are as follows;Year 1;$1,100,000;Year 2;$1,450,000;Year 3;$1,300,000;Year 4;$950,000;You have now been tasked with providing a recommendation for the project based on the;results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the;initial cost of the machine is $3,000,000.;1. What is the projects IRR? (10 pts);2. What is the projects NPV? (15 pts);3. Should the company accept this project and why (or why not)? (5 pts);4. Explain how depreciation will affect the present value of the project. (10 pts);5. Provide examples of at least one of the following as it relates to the project: (5 pts each);a. Sunk Cost;b. Opportunity cost;c. Erosion;6. Explain how you would conduct a scenario and sensitivity analysis of the project. What;would be some project-specific risks and market risks related to this project? (20 pts);Task 5: Cost of Capital;AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine;should be the cost of capital and would like to determine it. You will assist in the process of;obtaining this rate.;1. Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new;bonds. Select current bonds from one of the main competitors as a benchmark. Key;competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman;Corporation.;a. What is the YTM of the competitors bond? You may use a number of sources;but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with;the highest possible creditworthiness. You may assume that new bonds issued;by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5;pts);b. What is the after-tax cost of debt if the tax rate is 34%? (5 pts);c. Explain what other methods you could have used to find the cost of debt for;AirJet Best Parts Inc.(10 pts);d. Explain why you should use the YTM and not the coupon rate as the required;return for debt. (5 pts);2. Compute the cost of common equity using the CAPM model. For beta, use the average;beta of three selected competitors. You may obtain the betas from Yahoo Finance.;Assume the risk free rate to be 3% and the market risk premium to be 4%.;a. What is the cost of common equity? (5 pts);b. Explain the advantages and disadvantages to use the CAPM model as the;method to compute the cost of common equity. Compare and contrast this;method with the dividend growth model approach. (10 pts);3. Compute the cost of preferred equity assuming the dividend paid for preferred stock is;$2.93 and the current value of the stock is $50 per share.;a. What is the cost of preferred equity? (5 pts);b. Is there any other method to compute this cost? Explain. (5 pts);4. Assuming that the market value weights of these capital sources are 30% bonds, 60%;common equity and 10% preferred equity, what is the weighted cost of capital of the;firm? (10 pts);5. Should the firm use this WACC for all projects? Explain and provide examples as;appropriate. (10 pts);6. Recompute the net present value of the project based on the cost of capital you found.;Do you still believe that your earlier recommendation for accepting or rejecting the;project was adequate? Why or why not? (5 pts);View Full Attachment;Course Project.docx Download Attachment;Course Project: Evaluating Investment Options;Objectives | Guidelines | Milestones | Grading Rubrics | Grading Rubrics;Objectives;Back to Top;The objective of the project is applying financial analysis concepts in real-life investment scenarios.;The project will be divided in two sections with Part I due at the end of Week 3 and Part II at the end;of Week 6. Part I of the project will give students the opportunity to use valuation and time value of;money techniques to evaluate stocks and bonds under different market conditions. Part II of the;project will require students to incorporate the concepts of cost of capital, capital budgeting and;capital structure in evaluating a specific capital investment project using the Net Present Value;approach. Both Part I and II will include calculations, as well as a written analysis about the results;and implications of these calculations.;For detailed instructions and requirements about Part I of this course project, click here.;For detailed instructions and requirements about Part II of this course project, click here.;Guidelines;Back to Top;The project is subdivided in Tasks. Part I contains Tasks 1, 2 and 3 and is due at the end of;Week 3. Part II contains Task 4 and 5 and is due at the end of Week 6.;Present all your calculations and formulas used along with your final results. You will be;graded on the quality of your calculations, as well as on the written analysis provided.;For any recommendations or conclusions provided, support your conclusions with detailed;information.;Use the grading rubric provided below as a guideline for project development.;All DeVry University policies are in effect including the plagiarism policy.;You may post any questions on this assignment under the weekly Q&A section.;Milestones;Back to Top;1. Deliverable #1 Due at the end of Week 3. For Deliverable #1, please respond to Tasks 1, 2;and 3.;2. Deliverable #2 Due at the end of Week 6. For Deliverable #2, complete Tasks 4 and 5.;Make sure to provide a yes/no recommendation on the purchase of the new machine. Justify;your recommendation.;Grading Rubrics;Back to Top;PART 1;Category;Points %;Description;Task 1;Assess Loan 50;Options;36;Calculate the EAR for two banks (20 pts), make a;recommendation to the best option (20 pts) and compute;payments for the selected loan (10 pts).;Task 2;Evaluate;40;Competitors;Stock;28;Calculate the value of the stock using the dividend growth;model (25 pts). Address the impact of changes in certain;variable conditions on market prices (15 pts).;Determine the coupon rate of bonds and compare it to the;market price (20 pts). Explain factors affecting bond risk (20;pts). Describe some covenants associated with bonds (10;pts).;Task 3 Bond;Valuation;50;36;Total;140;100;PART 2;Category;Task 4;Capital;Budgeting;Points %;Description;75;50;Compute the NPV and IRR of a project and make;recommendations based on calculations (30 pts). Analyze;factors affecting the capital budgeting process (25 pts).;Describe project risks and analysis (20 pts).;Calculate the WACC and describe methods for computing the;cost of capital (60 pts). Explain the appropriate use of the;WACC (10 pts). Compute the NPV of a project based on the;WACC (5 pts).;Task 5;Cost of;Capital;75;50;Total;150;100;Grading Rubrics;Back to Top;Start your project as quickly as possible. You should become acquainted with the project instructions;during Week 1 of the course and progressively move forward. A recommended timeline for project;development is as follows;Week 1;Get acquainted with project instructions and rubrics;Search for prime rate;Post any questions under Q&A;Week 2;Complete Task 1;Work on Yahoo Finance to obtain the last dividend and price of competitor;companies;Post any questions under Q&A;Week 3;Complete Tasks 2 and 3;Week 4;Work on Task 4;Post any questions under Q&A;Week 5;Complete Task 4;Search for competitors betas;Post any questions under Q&A;Week 6;Work and complete Task 5;Your Course Project should be well-organized. Please attach any necessary Excel Workbooks as;necessary along with your written analysis.;Back


Paper#30180 | Written in 18-Jul-2015

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