Capital budgeting analysis

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Instructions for Milestone #3 (Section IV) The following additional information should be used when you write up your Milestone #3 (Final Project, Section IV) assignment. Based on the in-class handout discussed on Monday, October 16, perform a capital budgeting analysis for HD. More specifically, use the spreadsheet and the following inputs provided. FCF’s for the five years as: FCF1 = $50,000,000 FCF2 = $45,000,000 FCF3 = $65,500,000 FCF4 = $55,000,000 FCF5 = $25,000,000 And the operating costs: OPC1 = 25,500,000 OPC2 = 25,500,000 OPC3 = 25,500,000 OPC4 = 25,500,000 OPC5 = 25,500,000 As noted in the instructions in the spreadsheet, assume HD’s WACC = 8% and it uses straight line depreciation when evaluating capital projects. 1. Determine the NPV for this project. Based on your NPV, should HD accept or reject the project? Briefly explain why it should accept or reject this project based on its NPV. 2. Determine the IRR for this project. Based on your IRR, should HD accept or reject the project? Briefly explain why it should accept or reject this project based on the IRR. 3. Why do financiers/analysts use the WACC for new projects, and also explain why analysts use the term “hurdle rate” when it comes to a firm’s WACC? 4. What happens to a project’s NPV if the WACC increases? Briefly explain why this is the case.
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HD
WACC

8%

20%
Year

Initial Investment
FCF
Operating Costs
Net Cash Flows
1)
NPV

0
-$65,000,000

-$65,000,000

$27,499,670.88

1

2

$50,000,000
$25,500,000
$24,500,000

$45,000,000
$25,500,000...


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