Details of this Paper

Wheel Industries is considering a three-year expansion project,

Description

solution


Question

Question;As a financial consultant, you have contracted with Wheel;Industries to evaluate their procedures involving the evaluation of long term;investment opportunities. You have agreed to provide a detailed report;illustrating the use of several techniques for evaluating capital projects;including the weighted average cost of capital to the firm, the anticipated;cash flows for the projects, and the methods used for project selection. In;addition, you have been asked to evaluate two projects, incorporating risk into;the calculations.;You have also agreed to provide an 8-10 page report, in good;form, with detailed explanation of your methodology, findings, and;recommendations.;Company Information;Wheel Industries is considering a three-year expansion;project, Project A. The project requires an initial investment of $1.5 million.;The project will use the straight-line depreciation method. The project has no;salvage value. It is estimated that the project will generate additional;revenues of $1.2 million per year before tax and has additional annual costs of;$600,000. The Marginal Tax rate is 35%.;Required;A. Wheel has;just paid a dividend of $2.50 per share. The dividends are expected to grow at;a constant rate of six percent per year forever. If the stock is currently;selling for $50 per share with a 10% flotation cost, what is the cost of new;equity for the firm? What are the advantages and disadvantages of using this;type of financing for the firm?;B. The firm;is considering using debt in its capital structure. If the market rate of 5% is;appropriate for debt of this kind, what is the after tax cost of debt for the;company? What are the advantages and disadvantages of using this type of;financing for the firm?;C. The firm;has decided on a capital structure consisting of 30% debt and 70% new common;stock. Calculate the WACC and explain how it is used in the capital budgeting;process.;D. Calculate;the after tax cash flows for the project for each year. Explain the methods;used in your calculations.;E. If the;discount rate were 6 percent calculate the NPV of the project. Is this an;economically acceptable project to undertake? Why or why not?;F. Now;calculate the IRR for the project. Is this an acceptable project? Why or why;not? Is there a conflict between your answer to part C? Explain why or why not?;Wheel has two other possible investment opportunities, which;are mutually exclusive, and independent of Investment A above. Both investments;will cost $120,000 and have a life of 6 years. The after tax cash flows are expected;to be the same over the six year life for both projects, and the probabilities;for each year's after tax cash flow is given in the table below.;Investment B;Investment C;Probability After;Tax;Cash Flow;Probability After Tax;Cash Flow;0.25 $20,000 0.30 $22,000;0.50 32,000 0.50;40,000;0.25 40,000 0.20;50,000;G. What is;the expected value of each project?s annual after tax cash flow? Justify your;answers and identify any conflicts between the IRR and the NPV and explain why;these conflicts may occur.;H. Assuming;that the appropriate discount rate for projects of this risk level is 8%, what;is the risk-adjusted NPV for each project? Which project, if either, should be;selected? Justify your conclusions.

 

Paper#43153 | Written in 18-Jul-2015

Price : $28
SiteLock