Calculate the after tax cash flows for the project

Assignment Help Finance Basics
Reference no: EM131229999

Assignment: LASA- Capital Budgeting Techniques

As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have agreed to provide a detailed report illustrating the use of several techniques for evaluating capital projects including the weighted average cost of capital to the firm, the anticipated cash flows for the projects, and the methods used for project selection. In addition, you have been asked to evaluate two projects, incorporating risk into the calculations.

You have also agreed to provide an 8-10 page report, in good form, with detailed explanation of your methodology, findings, and recommendations.

Company Information

Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of $1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of $1.2 million per year before tax and has additional annual costs of $600,000. The Marginal Tax rate is 35%.


A. Wheel has just paid a dividend of $2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for $50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?

B. The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?

C. The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.

D. Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.

E. If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?

F. Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?

Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost $120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year's after tax cash flow is given in the table below.

Investment B

Investment C


After Tax Cash Flow


After Tax Cash Flow













G. What is the expected value of each project's annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.

H. Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.

Reference no: EM131229999

What is the value of the option to wait

I the company waits one year, there is a 60% probability that the contract price will generate an aftertax cash flow of $500 per ounce and a 40% probability that the afterta

In situations where irr analysis and npv disagree

In situations where IRR analysis and NPV disagree on which of two projects is preferred, if cash flows are assumed to be reinvested at the cost of capital then the MIRR appr

What is the stock expected price seven years from today

A stock that currently trades for $40 per share is expected to pay a dividend of $2 per share.  The dividend is expected to grow at a constant rate over time.  The stock has

Computation of company stock capm

A particular stock has an expected return of 11%. If the expected risk premium on the market portfolio is 8%, and the risk-free rate is 5%, what is the stock's CAPM beta?

What is the inital monthly payment

Q1)"A borrower is considering a 1-year adjustable rate mortgage of $250,000 that starts at 2.5%, 30 year amortization. The margin is 2.25%. The annual change caps are 2% per y

What is her cash flow now

What will Ms. Browns cash flow be under the proposed capital structure of the firm? Assume that she keeps all 250 of her shares. (Do not round intermediate calculations and

Financial performance of the organization

As the CFO, suggest one (1) key strategy that you might use in order to improve the financial performance of the organization. Recommend an approach to implement the suggest

Time value of money important to company

Select an apparel company planning another facility: Discuss interest rates to begin today or in six months using TVM. How is the time value of money important to the company?


Write a Review

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd