Managerial Finance, accounting assignment help

User Generated

Eynebav

Business Finance

Description

Your probationary period at the Cosmo K Manufacturing Group continues. Your supervisor, Gerry, assigns you a project each week to test your competence in finance.

For Part 4-a of this week's project, Gerry has asked you to consider two mutually exclusive investments and incorporate risk considerations into the process of evaluation.

For Part 4-b, Gerry has asked that you create your final report, incorporating your findings in Weeks 1–4 into a comprehensive document. This item will be called your Course Project Report and should be submitted in a Microsoft Word document. Review all your responses to Gerry's questions for Weeks 1 through 4 and make any corrections or improvements that have been provided to you. Then incorporate the revised work into your final report. Make sure you integrate the four parts so that your report reads as one report rather than four reports pasted together. Make sure all responses are complete and accurate, supported by references and documented examples.

Part 4-a: Project Selection and Risk

The Cosmo K Manufacturing Group is considering the addition of a new smelting machine or a new paving machine. The two investments are mutually exclusive; if one is selected, the other is rejected. The annual cash flows after taxes and the effects of depreciation, which begin one year from project start, and their respective probabilities are given below:

Smelting MachinePaving Machine
ProbabilityNet Cash Flows per YearProbabilityNet Cash Flows per Year
0.2$14,100.000.2 $2,000.00
0.5$16,000.000.5$16,000.00
0.2$17,000.000.2$22,000.00
0.1$20,000.000.1$33,000.00

Each project has an expected life of 4 years and will cost $45,000. The riskier project will be evaluated at the company's WACC plus 3%, and the less risky project will be evaluated at the company's WACC. Cosmo K has the following capital structure:

Debt:30%
Preferred stock:16%
Common stock:54%

Stock:

This capital structure is current and consistent with the company's objectives and so will be used to raise any new funds. All new debt will be raised using long-term bonds, with no short-term debt being used for the new project. New bonds will have a coupon rate of 13%. The company's common stock is currently selling for $65 per share, paid a dividend of $4.25 last year, and has an expected growth rate of 6% indefinitely. There will be no floatation costs on new common stock. Preferred stock can be sold for $90 per share and pays a dividend of $10, with a floatation cost of $2 per share. Currently, the market risk premium is 5% and the risk-free rate is 8%. Cosmo K's beta coefficient is currently 1.23 and is expected to be consistent for the foreseeable future. The tax rate is expected to be 40% for the next decade.

Tasks:

Answer the following questions:

  • What is the component cost of capital for the company? Calculate using the CAPM.
  • What is the company's WACC?
  • What are the expected cash flows for the investments?
  • What is the standard deviation for each investment?
  • What is the coefficient of variation for each investment?
  • Given the data above, which investment has the higher risk?
  • What is the expected net present value (NPV) for each investment?
  • What is the internal rate of return (IRR) of the investments?
  • According to the decision rules for the NPV and those for the IRR, is there an acceptable project? Explain your answer.
  • Is there a conflict between the two decision methods? If so, what would you use to recommend a project?

Submission Details:

  • Show the data used and the calculations for each question in a Microsoft Excel sheet and the analysis in a Microsoft Word document.
  • Name your Microsoft Excel sheet MBA6010_W4_A2a_LastName_
    FirstName.xls and your Microsoft Word document MBA6010_W4_
    A2a_LastName_FirstName.doc. Name the course project report MBA6010_W4_A2b_LastName_FirstName.doc.

User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Attached.

smelting machine
cashflow
probability
deviation
14.100,00
0,2
2.820,00
(2.120,00)
16.000,00
0,5
8.000,00
(220,00)
17.000,00
0,2
3.400,00
780,00
20.000,00
0,1
2.000,00
3.780,00
expected
16.220,00
cashflow
standard
deviation
coefficient of
variation
Paving machine
2.000,00
0,2
400,00
(14.100,00)
16.000,00
0,5
8.000,00
(100,00)
22.000,00
0,2
4.400,00
5.900,00
33.000,00
0,1
3.300,00
16.900,00
expected
16.100,00
cashflow
standard
deviation
coeeficient of
variation

dev.sq.*prob.
898.880,00
24.200,00
121.680,00
1.428.840,00
2.473.600,00
1.572,77
0,0970
9,70
39.762.000,00
5.000,00
6.962.000,00
28.561.000,00
75.290.000,00
8.676,98
0,5389
53,89

Net Present Value Analysis
SMELTING
YEAR
CASH FLOWS PVIF@12.53% PV
0
(45.000,00)
1,0000 (45.000,0000)
1
16.220,00
0,8887 14.413,9341
2
16.220,00
0,7897 12.808,9701
3
16.220,00
0,7018 11.382,7158
4
16.220,00
0,6236 10.115,2722
NPV
3.720,8922

Internal Rate of Return Analysis
SMELTING
YEAR
CASH FLOWS
0
(45.000,00)
1
16.220,00
2
16.220,00
3
16.220,00
4
16.220,00

PAVING
YEAR

PAVING
YEAR

0
1
2
3
4

CASH FLOWS PVIF@15.53% PV
(45.000,00)
1,0000 (45.000,0000)
16.100,00
0,8656 13.935,7743
16.100,00
0,7492 ...


Anonymous
Excellent resource! Really helped me get the gist of things.

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Similar Content

Related Tags