You are the Chief Financial Officer and lead Project Development President for a snack. You are presented with a few options
about what to do next for value-creation from your teams. However, you must evaluate each project and then make the ultim
choice on the project acceptance.
The firm you work for is a large publicly traded company. It currently has 10,000,000 shares outstanding and 200,000 bonds o
grows at 3% per year indefinitely. You also know that the company's current share price is $45. You also know that the beta o
on a T-bill was 1.9%. The bonds for the firm were all issued on the same day in the past, November 2010, and have a maturity
sold at full par value. These bonds possess an attractive yield and are currently priced at a premium, $1,200. The company ta
Project 1: This new project will create avocado chips. It will cost $25,000,000 today for a new building and
machines. We would invest in NWC equivalent of 10% of capital expenditure cost today. We know that this
project will bring in sales of $14,000,000 in the first year, growing at a rate of 25% for the first 2 years and
growing at a rate of 12% for the next 4 years. We employ a MACRS 7-year depreciation scale for all CAPEX.
In year-end 3, we will have to purchase $9,000,000 in new machines. Net working capital account will be
25% of sales for each year. Costs of goods sold will be 50% of sales until we get the new machines at which
they will drop to 38% of sales. After year 6, we are quitting the entire project and liquidating all, we can sell
the original machines for $4million and the new machines for $4million. This project is in line with a new
product division that has similar risk levels to existing operations.
Which Project would you choose and why?
For project 1, how did you select the discount rate and why?
For project 1, if costs across all years went to 55% of sales revenues, what would be the new NPV? If this
scenario, sensitivity or simulation analysis?
As a financial manager, describe and explain some factors (or advantages/disadvantages) to consider when
deciding which financing choices (aka capital structure) could be used for this project.
Of the three motives for holding cash within a firm, which do YOU feel is most important, and why (no
right/wrong choice, if the choice is explained correctly)? Define your choice and why you chose it. What are
the major costs associated with holding cash in a firm?
Of the five reasons given for why investors may prefer dividends, which do you think sounds most
belivable/plausible? Define your choice and why you chose it?
resented with a few options
ject and then make the ultimate
anding and 200,000 bonds outstanding. The company's most recently paid dividend was $3 per share, this dividend
ou also know that the beta of the firm is 1.2 and the expected return on the market is 9%. The most current rate offered
er 2010, and have a maturity date of November 2040. They pay 8% coupons, are paid semiannually, and were originally
um, $1,200. The company tax rate is 21%.
Project 2: This new project will be production of bamboo utensils (forks, knives, etc.). Bamboo is more
sustainable than plastic, it can be reused, has natural antimicrobial properties, and is one of the fastest
growing plants in the world. This project will cost $11,000,000 today to purchase the land and creation of
the bamboo farm. It will cost $6,000,000 for the machines needed to process and produce the utensils. The
farm will be depreciated as a 20-year MACRS class and the machines following the 7-year MACRS class. The
first year of sales will be $7,000,000; however, we cannot begin selling until we have grown bamboo, so not
until after year 2. The NWC needed today will be $1,000,000 and will simply be recovered at the end of the
project life. Given our farming, we do not need to purchase the machines until the end of year 2. This
project, from today, will last 8 years. At the end of year 8, we will sell our farm for a projected $15,000,000
and our machines are worthless. Sales will grow at a rate of 25% per year and costs will be 40% of revenues
in year one and steadily decrease by 3% per year (e.g. next year will be .4(1-.03) COGS). This project is more
risky and will require an 13% rate of return.
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