Capital Budgeting Techniques, science homework help

Assignment
1: LASA # 2—Capital Budgeting Techniques

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 a detailed 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.

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.

Turn in your completed work to the M5: Assignment 1 Dropbox by Monday, October 10, 2016.