In this assignment, you will develop an expansionary capital budgeting plan. In order to complete this task, you first need to identify the stakeholder. Start by reviewing the question statements outlined below. Respond to the questions 1-4 in a word document. Then, complete question 5, the capital budgeting plan using Excel.
What do you consider as the most important stakeholder? Is it important for corporations to focus on maximizing shareholder wealth? Explain in your own words where each of the major stakeholders is represented within the financial statements of the corporation. You should be able to discuss at least four major stakeholders at this point. For example, the customers provide sales revenue and are represented within the income statement sales revenue figures.
Assess the relevant cash flows used to form a capital budgeting decision model. For this assignment, focus on an expansionary problem.
Evaluate the cost of capital (WACC) for use in a capital budgeting decision model. Make sure to define each component of the formula. Explain how the resulting cost of capital (WACC) is used within a capital budgeting model. How can the Capital Asset Pricing Model contribute to this analysis? Explain.
Weigh each of the following decision metrics that can be used within a capital budgeting decision model: net present value, internal rate of return, modified internal rate of return, payback period, and discounted payback period. Explain how each metric is formed and discuss the critical value of each when forming conclusions within a capital budgeting decision model. Discuss which method has the strongest basis for being used and under which conditions each might be the preferred method.
Develop a capital budgeting decision model that displays cash flows, cost of capital, and decision metrics (i.e., NPV, IRR, MIRR, regular payback, and discounted payback). Then, form a conclusion based upon the analysis. What are some problems with the payback period? Is NPV better than IRR? Develop your analysis within an Excel spreadsheet-based on this information:
Assume for a project a company’s units sold are 3,500,000 in the year 2019, and they are projected to grow each subsequent year at 5% until the end of the project in year 2023.
Assume each unit will sell for $2.10.
Assume the variable cost of producing each unit is $1.10.
Assume the fixed costs are $100,000 per year
Assume straight-line depreciation of a machine (lasting until the end of the project) with an initial investment in a machine of $500,000 and $0 salvage value
The cost of capital is calculated based upon funding from retained earnings and from debt. The company is assumed to fund itself with 50% debt and 50% retained earnings. The cost of debt capital, rD, is 7%. The cost of capital from retained earnings, rS, is based upon the Capital Asset Pricing Model. The risk-free rate in the market is 5% and the difference between the expected return on the market and the risk-free rate is 5%. The beta of the company is 2.0. The tax rate is assumed to be 40%.
Calculate the project cash flows and apply the decision metrics
Complete a sensitivity analysis in which you reevaluate the model considering the selling price per unit is $1.90, $2.00, and $2.30. Present and comment on the results.
Write your answers to the qualitative questions in a Word document and paste your spreadsheet analyses into the Word document.
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