Management has already signed the contract and committed to a project whichhas a large, negative net present value. This presents a problem which they must solve quickly.
After considerable thought, a thorough re-engineering of the manufacturing facility led to a reduction in the cost of goods sold to 55% from 60%. It also resulted in increased flexibility in the products the facility could produce. As a result of the increased flexibility, Sales and Marketing now estimates that sales revenue would increase to $60,000,000 from $50,000,000 and would grow at 7% rather than the original estimate of 4%.
Your boss has now asked you to evaluate the project in light of this new information. In addition, the instructions indicate that you should pick the financing scheme (from Part B) that makes the project the most profitable.
Your report should include a brief discussion of the project from the beginning, a discussion of the three financing alternatives and their effect on the WACC, an analysis of the revised project using the alternative discount rates and a conclusion as to whether or not the project should be undertaken.
The expectation for the final product is a complete report beginning with the capital budgeting project analysis, determining the effects on the capital structure and cost of capital, and finally evaluating the impact of the project on the company financial statements and value. Grading will include grammar, spelling and organization as well as accuracy of calculations and financial knowledge.