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Create an assessment to address the following problems/questions:
1.Assess the relevant cash flows used in forming a capital budgeting decision model. For this assignment, focus upon an expansionary problem.
2.Evaluate the cost of capital (wacc) for use in a capital budgeting decision model. Make sure to define each component of the formula. Explain how the resulting cost of capital (wacc) is used within a capital budgeting model. How can the Capital Asset Pricing Model contribute to this analysis? Explain.
3.Weigh each of the following decision metrics that can be used within a capital budgeting decision model: net present value, internal rate of return, and payback period. Explain how each metric is formed and discuss the critical value of each in forming conclusions within a capital budgeting decision model. Discuss which method has the strongest basis for being used and under which conditions each might be the preferred method.
4.Develop a capital budgeting decision model showing cash flows, cost of capital and decision metrics (i.e., npv, irr and payback). Form a conclusion based upon the analysis. Begin with the example problem on age 405 and 406 of the textbook, Table 12.1. Modify the problem in the following fashion and develop the analysis within an Excel spreadsheet. •Assume the units sold are 2,700,000 in year 2013 and they grow each subsequent year at 5%.
•Assume each unit will sell for $2.10
•Assume the variable cost of producing each unit is 1.10.
•Assume straight-line depreciation.
•The cost of capital is calculated based upon funding from retained earnings and from debt. The company is assumed to fund itself with 50% debt and 50% retained earnings. The cost of debt capital, rD, is 7%. The cost of capital from retained earnings, rS, is based upon the capital asset pricing model. The risk free rate in the market is 5% and the difference between the expected return on the market and the risk free rate is 5%. The beta for the company is 2.0. The tax rate is assumed to be 40%.
•Complete a sensitivity analysis in which you reevaluate the model considering the selling price per unit is 1.90, 2.00, 2.10, 2.20 and 2.30. Present and comment on the results.
•Assume all other assumptions as given.

Support your paper with at least three (3) resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included. Your paper should demonstrate thoughtful consideration of the ideas and concepts that are presented in the course and provide new thoughts and insights relating directly to this topic. Your response should reflect scholarly writing and current APA standards. Be sure to adhere to Northcentral University’s Academic Integrity Policy.

Length: 5-7 pages (not including title and reference pages) with approximately 350 words.

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Capital Budgeting – Expansionary Project

In this assignment, we consider an expansionary capital budgeting project. The capital budgeting process include the formulation of cash flows, the development of the cost of capital (i.e., weighted average cost of capital), and the calculation of decision metrics including the net present value and the internal rate of return. As an end result, for example, if the net present value of a project is positive, then the project should be undertaken and the expected result will be that shareholder wealth will increase upon the announcement and execution of the project.

The cash flows in the capital budgeting process are including the initial cash flows of the capital expenditure as well as the additional investment into the companies’ new working capital that is needed. The future cash inflows will be estimated using the following formula:

Free Cash Flows = [EBIT(1-tax rate) + Depreciation and Amortization] – [Additional capital expenditures – additional net working capital]

The EBIT is defined as sales less variables expenses less fixed expenses less depreciation. In the terminal period of the project, we will estimate the cash inflow associated with selling the assets purchased initially. This will be calculated as (salvage value – book value)*(tax rate).

Review the resources listed in the Books and Resources area below to prepare for this week’s assignments.

Books and Resources for this Week:

Books

Reference

Instruction

Brigham, E. F., & Houston, J. F. (2011) Fundamentals of financial management + Thomson One – Business School Edition

Read Chapters 10-12

Articles

Reference

Instruction

Ariff, M., & Hassan, T. (2008). How capital structure adjusts dynamically during financial crises.

http://search.proquest.com.proxy1.ncu.edu/docview/198779063?accountid=28180