Conservative or aggressive in capital budgeting analysis

Assignment Help Financial Management

Reference no: EM131937339

WES Inc. is hoping to reduce its level of fixed costs by implementing production assets that are more energy efficient and reliable. They are considering an initial outlay of $254 million for new industrial equipment that has an expected life of 8 years. The assets will be dereciated straight line to an ending book value of $62 million, which is also the expected market value. Existing equipment has a book value of zero and could be salvaged today for $26 million. WES analysts have determined the estimate for annual fxied cost savings to be about $38 million. In addition, WES will be able to reduce its NWC by $6.5 immediately- no other NWC changes are expected. WES analysts have determined that the annual fixed cost savings is somewhere between $36 and $46 million (assume a uniform distribution). The RRR is assumed to be 8.5%, and WES has a marginal tax rate of 35%. Does WES seem to be conservative or aggressive in its capital budgeting analysis? What types of mistakes will this tend to cause them? Compute the project's NPV. How confident will you be in recommending this project?

Reference no: EM131937339

Questions Cloud

Negotiating your salary compensation package : You've just taken a new job and are negotiating your salary compensation package. Your base salary is $61366 per year.

Earns constant interest compounded annually : Consider the following deposits made into a savings account that earns a constant interest compounded annually.

How much interest was earned on the investment : How much interest was earned on the investment? How much will be available on my 32nd birthday?

According to the net present value technique : According to the net present value technique, a project is considered acceptable if:

Conservative or aggressive in capital budgeting analysis : Does WES seem to be conservative or aggressive in its capital budgeting analysis? What types of mistakes will this tend to cause them?

Prepare amortization schedule for three-year loan : Prepare an amortization schedule for a three-year loan of $100,000. The interest rate is 5% per year, and the loan calls for equal annual payment.

Relates to the firm weighted average cost of capital : What is the weight of the debt as it relates to the firm's weighted average cost of capital?

Stock price will be because of tax shield benefit of debt : What is the new stock price will be because of tax shield benefit of debt, and how many shares it can repurchase?

Calculate pre-tax cost of debt capital : Calculate Pre-tax cost of debt capital. What is the current price of the bonds if the coupon rate on those bonds is 9.00 percent?

User Account

All Pages