Based on the following project assumptions, develop a capital budgeting analysis

INSTRUCTIONS:

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1) Based on the following project assumptions, develop a capital budgeting analysis and determine the NPV and the IRR for the project. State your recommendation.

Equipment invoice $300,000
Transportation and installation $ 85,000
Training $ 20,000
Projected incremental increase in sales in YR 1 $245,000
Sales escalate at a rate of 9% per year after YR 1.
Expenses in YR 1 are projected to be 32% of the capital investment.
Expenses escalate at a rate of 4% per year after YR 1.
Depreciation is straight line, 5 years.
Salvage value at the end of YR 3 $ 88,000
WACC 10%
Project life 3 years
Tax rate 40%
Tax credits may be used against other income.

2) European bonds pay coupons annually, while U.S. bonds pay coupons semiannually. If the coupon rate on a European bond is 12% (annual coupons), what is the comparable coupon rate for a U.S. bond (semiannual coupons) assuming all other factors are equal?

3) Calculate the WACC given the following assumptions:

a) Company tax rate is 40%.

b) Company has an outstanding bond issue with a 6-7/8 coupon, market price of 102-5/8 (percent of 100% par, in 32nds), semiannual coupon payments, and 12 years to maturity.

c) Company has an outstanding preferred stock issue paying an 8% dividend, $100 par, and a market price of $98.35. Flotation (issuance) costs on a new issue are 8%.

d) Common equity financing is through retained earnings. The company has a beta of 1.22. The market risk premium is 6% and the risk-free rate is 4%.

The company’s capital structure is 40% debt, 10% preferred, and 50% common equity.

4) You are looking at two investment options, Option A and Option B. Following are their populations of returns for the last five years:
Option A Option B
Year 1 15% 8%
Year 2 22% 12%
Year 3 8% 10%
Year 4 2% 7%
Year 5 13% 9%

Which option is preferable on a relative measure?

6) Last year BBB Inc. had $275 million of sales, and it had $190 million of fixed assets that were used at 75% of capacity. In millions, by how much could BBB sales increase before the need to increase its fixed assets?

7) XYZ Corporation’s budgeted monthly sales are $10,000, and they are constant. Its customers pay as follows: 30% pay in the first month and take the 2% discount, while the remaining 70% pay in the month following the sale and do not receive a discount. Purchases for next month’s sales are constant at 60% of projected sales for the next month. Payments for labor costs, rent, and taxes are 25% of sales for the month. Construct a cash budget for a typical month. Calculate the average cash gain or loss during the month.

8) You were hired as a consultant to Quigley Company, whose target capital structure is 30% debt, 20% preferred, and 50% common equity. The interest rate on new debt is 7.50%, the yield on the preferred is 6.20%, the cost of retained earnings is 13.25%, and the tax rate is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?

9) Suppose you believe that Johnson Company's stock price is going to increase from its current level of $22.50 sometime during the next 6 months. For $250.30 you can buy a 6-month call option giving you the right to buy 100 shares at a price of $25 per share. If you buy this option for $250.30 and Johnson's stock price actually rises to $48, what would your net profit be?