*label*Business Finance

### Question Description

The director of finance has discovered an error in his WACC calculation. He did not factor in the tax rate when determining the cost of debt. UPC has a line of credit at 4% interest, and the company is taxed at 30%. Further, assume that UPC’s required rate of return on equity is 14%, and its capital structure is 40% debt and 60% equity. Additionally, the budget committee question and answer session revealed that UPC has discovered a technology that will increase its product life span by 1 year. The new technology will add $120,000 and $130,000 to projects A and B’s initial capital outlay, respectively. Further, the finance department has determined that cash flows for years 1, 2, and 3 will be unchanged. However, net cash flows for year 4 will be $300,000 and $150,000 for projects A and B, respectively.

- Using the attached Excel file, the UPC scenario, and the new information above, calculate the NPV, IRR, MIRR, and payback periods from projects A and B. You must input all of your data into an Excel spreadsheet and show all formulas.
- Using MS Word, explain any risk factors inherent in the budgeting for the 2 projects.

### Unformatted Attachment Preview

Purchase answer to see full attachment

## Tutor Answer

Attached.

Capital Expenditure Planning & Budgeting for Universal Parts Company

Universal Parts Company - Estimated Cash Flows (CF) for Projects A & B (in thousands of dollars):

Tax= 30%

Kd= I(1-T)

Kd=0.04(1-0.3) = 2.8%

Ke= 14%

Year

CFA

CFB

0

($1,120)

($1,130)

Assumme that tax effects, depreciation, salvage values, a

1

$100

$700

operating costs have been included in the cash flows

2

$600

$500

3

$800

$200

4

300

150

Net Present Value (NPV)

(1) Determine each project’s NPV.

WACC = WdKd+WeKe

WACC =

9.52%

Activity: Choose both projects if two projects are independent, and their NPVs are positiv

Activity: Choose the project with the higher posi...

*flag*Report DMCA

Brown University

1271 Tutors

California Institute of Technology

2131 Tutors

Carnegie Mellon University

982 Tutors

Columbia University

1256 Tutors

Dartmouth University

2113 Tutors

Emory University

2279 Tutors

Harvard University

599 Tutors

Massachusetts Institute of Technology

2319 Tutors

New York University

1645 Tutors

Notre Dam University

1911 Tutors

Oklahoma University

2122 Tutors

Pennsylvania State University

932 Tutors

Princeton University

1211 Tutors

Stanford University

983 Tutors

University of California

1282 Tutors

Oxford University

123 Tutors

Yale University

2325 Tutors