PGA's management team is considering two projects, a golf club project and a helmet project.
WACC = 9.3%
PGA:
% of debt in capital structure 25%
% of equity in capital structure 75%
Before-tax required cost of debt 6%
Tax rate 30%
Cost of equity 11%
B. Capital Budgeting
Project information:
Golf club project Helmet project
Upfront costs (10,000,000) (8,000,000)
Annual cash flows Year 1 $0 $3,000,000
Year 2 $0 $3,000,000
Year 3 $4,000,000 $2,000,000
Year 4 $10,000,000 $2,000,000
1. Which project is superior using the payback method?
2. Show a clear equation for your findings on Excel or a calculator.
3. Show a clear equation for your findings typed.