Reference no: EM133072537
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.
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