Assess Capital Budgeting Problems - Replacement Project
Develop an assessment in which you address the following problems/questions:
1. Assess the relevant cash flows used in forming a capital budgeting decision model. For this assignment, focus upon a replacement problem.
2. 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 page 409 and 412 of the textbook, Table 12.2. Modify the problem in the following fashion and develop the analysis within an Excel spreadsheet.
- Assume the costs except depreciation are uncertain for the new machine. Develop the analysis in a spreadsheet and evaluate the sensitivity of the results for costs of 300, 400 and 500.
- Assume straight-line depreciation on both machines.
- The cost of capital is calculated based upon funding from retained earnings and from debt. The company is assumed to fund itself with 40% debt and 60% retained earnings. The cost of debt capital, rD, is 8%. 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 1.5. The tax rate is assumed to be 40%.
- Assume all other assumptions as given.
TEXTBOOK: Fundamentals of Financial Management, Brigham & Houston (2016), 14th Edition, Cengage Learning.