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BUSN379_Course_Project_Part_II

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Question;Course;Project Part II;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 firm?s 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 project?s IRR? (10 pts);2.;What;is the project?s 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 competitor?s 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)

 

Paper#49575 | Written in 18-Jul-2015

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