Investing in Capacity|Course hero helper

Posted: February 25th, 2023

In this Milestone, we apply tools, knowledge, and insight gained throughout this course. You will be required to:

  • Apply time value of money concepts to determine project value.
  • Assess a project’s expected cash flows.
  • Apply and interpret capital budgeting criteria, including Net Present Value, Payback Period, and Internal Rate of Return.
  • Apply cost-of-capital pricing formulas to assess financing options. Apply and interpret capital budgeting criteria.

Please see Case requirements and Rubric attached below

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Grading Criteria

Section A: Explain Components of Project Analysis

1. Weighted Average Cost of Capital (WACC)

Begin your analysis of acquisition by explaining why only some component costs of the firm are included when computing financing costs for this project, concentrating on the choice between a project/divisional cost of capital versus a firm-wide cost of capital approach. (max 400 words) [30 points]

2. Principles for Cash Flow Estimation

  • Consider one Complement sold within each franchise location and one Substitute establishment. (max 200 words) [20 points]
  • Because this CMS will represent an investment in fixed assets, explain whether this decision will change Operating Cash Flow (see Example 2.6 on p. 49 of our required text) and Free Cash Flow (see p. 49 of our required text). (max 100 words) [10 points]

Section B: Evaluate

Evaluation of Alternatives

  • Your evaluation of this potential acquisition requires you to select and apply investment decision rules. In this section, you are to present an evaluation of this acquisition based on an application of the decision rules selected and a summary of benefits and limitations of these capital budgeting techniques. (500 words max) [20 points]
  • Your evaluation of the acceptability of this CMS requires you to supply a recommendation on the acceptability of investment in this project based on the preceding categories of information. In the concluding section, you are to elaborate on the limitations of the above analysis, including what further sources of information you would like to use to make a more informed decision. (400 words max) [20 points]

SOLUTION

  1. Weighted Average Cost of Capital (WACC)

When computing the financing costs for a project, only some component costs of the firm are included because not all financing sources have the same cost of capital. Typically, firms use a weighted average cost of capital (WACC) approach to determine the cost of capital for a project. The WACC is the weighted average of the costs of equity and debt, where the weights represent the proportion of each source of financing in the firm’s capital structure.

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