Questions
1. a. What capital budgeting evaluation or analytical technique is the most appropriate one to use,and why?
b. Should more than one technique be used? Discuss and explain.
2. If mostly debt(but not all debt) is used to finance the purchase, should the cost of debt be used as thecost of capital,or should the WACCor some other discount rate be used? Explain and justify your answer.
3. a. There is some debate about the costs that should be considered in the computation of total initial outlay. Please indicate those appropriate costs to be included by itemizing(listing by name) them, and also discussany that should not be included and explain why.
b. Based on your answer to Question 3 above, what are the total cash outlays to be incurred at the beginning of the project (time zero on the time line)?
4. Next, calculate the annual operating cash flows for years 1 through 6, ensuring that you include all pertinent revenues and expenses. Remember to compute depreciation using MACRS, and that you use the appropriate depreciable base cost for the equipment. Please itemize these so that all members of the team will be able to review them, line by line. And remember any final (terminal) year calculations that may be appropriate (salvage value, taxes, return of net working capital, etc.)
5. As a result of your discussion in question 2 above, identify and calculate the appropriate cost of capital (discount rate) that should be used in a net present value analysis, or as the basis forcomparison when using the IRR approach. Then use this discount rate to complete your NPV analysis (calculate the NPV), or to compare against the project's calculated IRR if you chose that method.
6. Using the results of your NPV or IRR analysis, what is your recommendation to the CEO and her team regarding the project? Are there any other factors that should be considered, such as any issues the team members noted? Explain(hints: scale and the possible use of hurdle rates).
Attachment:- Cap Budgeting-Case Study.rar