Once again, your team is the key financial management team for your company. The company’s CEO is
now looking to expand its operations by investing in new property, plant, and equipment. You recently
calculated the WACC for your company, which will now be useful in evaluating the project’s
effectiveness. You are now asked to do some capital budgeting analysis that will determine whether the
company should invest in these new plant assets. The parameters for this project are:
You will be using the same company for this project that you used in the Week 6 project ( Costco). The
company is now looking to expand its operations and wants you to do some analysis using key capital
budgeting tools to do this. The parameters for this project are as follows.
The firm is looking to expand its operations by 10% of the firm’s net property, plant, and equipment.
(Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the
firm’s balance sheet.)
The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the
equipment will be 5% of the property, plant and equipment’s cost.
The annual EBIT for this new project will be 18% of the project’s cost.
The company will use the straight-line method to depreciate this equipment. Also assume that there will
be no increases in net working capital each year. Use the same marginal tax rate that you used in the
Week 6 project.
The hurdle rate for this project will be the WACC that you calculated in Week 6. Deliverable for this Project
In a Word Document, prepare a short presentation that will highlight the following items. Your calculations for the amount of property, plant, and equipment and the annual depreciation
for the project Your calculations that convert the project’s EBIT to free cash flow for the 12 years of the project. The following capital budgeting results for the project
o Net present value
o Internal rate of return
o Discounted payback period. Your discussion of the results that you calculated above, including a recommendation for
acceptance or rejection of the project
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