Reference no: EM132408118
Assignment Objective
The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company’s WACC as a starting point to estimate the discount rate to use in the net present value analysis of new projects (or of termination decisions). You may need to know the technique for application in some case study solutions.
The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources with little guidance, and in applying sound judgment when encountering naturally occurring measurement errors.
Assignment 1
This discussion has 2 parts:
Understanding what the net present value (NPV) tells us.
The NPV decision rule says to accept the project if the NPV is greater than zero. You perform a thorough capital budgeting analysis on a project that requires a $1,000,000,000 initial investment and calculate the net present value (NPV) as $1. Following the rule, you tell your boss she should accept the project. She laughs and says "do you think I would really invest $1,000,000,000 for a measly $1 NPV? You should be fired" How would you respond to her?
Real Options
Give two examples of "real options" that you have come across in your professional life, or that may come up in projects in a business you wish to start, or that may come up in the projects at a company in which you hope to be employed.
Assignment 2
Task:
Senior management asks you to recommend a decision on which project(s) to accept based on the cash flow forecasts provided.
Relevant information:
The firm uses a 3-year cutoff when using the payback method.
The hurdle rate used to evaluate capital budgeting projects is 15%.
The cash flows for projects A, B and C are provided below.
|
Project A
|
Project B
|
Project C
|
|
Year 0
|
-30,000
|
-20,000
|
-50,000
|
|
Year 1
|
0
|
4,000
|
20,000
|
|
Year 2
|
7,000
|
5,000
|
20,000
|
|
Year 3
|
20,000
|
6,000
|
20,000
|
|
Year 4
|
20,000
|
7,000
|
5,000
|
|
Year 5
|
10,000
|
8,000
|
5,000
|
|
Year 6
|
5,000
|
9,000
|
5,000
|
Assume the projects are independent and answer the following:
Calculate the payback period for each project.
Which project(s) would you accept based on the payback criterion?
Calculate the internal rate of return (IRR) for each project.
Which projects would you accept based on the IRR criterion?
Calculate the net present value (NPV) for each project.
Which projects would you accept based on the NPV criterion?
Assume the projects are mutually exclusive and answer the following:
Which project(s) would you accept based on the payback criterion?
Which projects would you accept based on the IRR criterion?
Which projects would you accept based on the NPV criterion?
Assignment 3
This discussion has 2 parts:
After reading the "Ethical Issues" box on page 330 of the required text, devise a plan that will minimize or reduce the impact of these cash flow estimation biases on effective decision-making.
The CFO of a firm you just started working for claims "we always have, and always will, use the weighted average cost of capital (WACC) as the rate to discount future expected cash flows from our proposed capital budgeting projects". What do you think of this strategy?
Assignment 4
The assignment is to estimate the weighted average cost of capital (WACC) for an actual corporation as of the current time. Actual managers would need to know their company's WACC as a starting point to estimate the discount rate to use in the net present value analysis of new projects.
The project also develops student skills in using elementary financial management models, in dealing with situations where there are too much or too little data, in employing publicly available data sources with little guidance, and in applying sound judgment when encountering naturally occurring measurement errors.