Calculate the cash payback period and discounted cash

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Reference no: EM132362048

CAPE CHEMICAL: CAPITAL BUDGETING ISSUES

REQUIREMENTS

Assume the role of a consultant, and assist Clarkson to answer the following questions.

1) Calculate Cape Chemical's weighted average cost of capital (WACC). Note: round to the nearest whole number. Discuss the theory used by Clarkson to determine Cape Chemical's optimum target capital structure (30% debt and 70% equity).

2) Since the used equipment will be financed with internal capital and the new equipment with a bank loan, should the same discount rate be used to evaluate each alternative? Explain.

3) Explain why an accurate WACC is important to a firm's long-term success.

4) Evaluate the strengths and weaknesses of the Cash Payback Period, Discounted Cash Payback Period, NPV, IRR and MIRR capital expenditure budgeting methods. Prepare a recommendation for Stewart regarding the capital budgeting method or methods to use in evaluating the expansion alternatives. Support your answer.

5) Calculate the Cash Payback Period, Discounted Cash Payback Period, NPV, IRR and MIRR for each alternative. For these calculations, assume a WACC of 15%. Based strictly on the results of these methods, should either option be selected? Why? Solution requires preparation of a spreadsheet.

6) Stewart is concerned that the projected annual sales growth rate of 15% for incremental blended material may be optimistic. Recalculate the Cash Payback Period, Discounted Cash Payback Period, NPV, IRR and MIRR for each alternative assuming the annual sales growth rates of 10% and 5%. Assume a WACC of 15%. Does the change in growth rate alter the recommendation made in question 5? Solution requires preparation of spreadsheets. Explain.

7) The projected cash flow benefits of both projects did not include the effects of inflation. Future cash flows were determined using a constant selling price and operating costs (real cash flows). The cash flows were then discounted using a WACC that included the impact
of inflation (nominal WACC). Discuss the problem with using real cash flows and a nominal WACC when calculating a project's Discounted Payback Period, NPV, IRR and MIRR.

8) What other issues should Stewart and Clarkson considered before a final decision regarding the expansion alternatives is made?

Attachment:- Case Study.rar

Reference no: EM132362048

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