Module 4 - Case Capital Budgeting and Capital Structure Assignment Overview Questions 1 and 2 for this assignment are computational in nature and

Module 4 - CaseCapital Budgeting and Capital StructureAssignment Overview

Questions 1 and 2 for this assignment are computational in nature and require the use of Microsoft Excel. Questions 3 and 4 are conceptual in nature and do not require computations. Make sure to thoroughly review the required background readings and work through both the concepts and the computational examples. The videos on computing NPV and IRR using Excel along with the sample spreadsheet should also help. If you are unable to figure out how to make the computations in Excel, then you can get partial credit by computing the answers using a calculator and thoroughly explaining your steps. For conceptual questions, make sure to thoroughly explain the reasoning for your answers and to use references from the required background readings.

Submit your answers to the following questions in a Word document, and also submit an Excel file with your computations for Questions 1 and 2:

1. The table below gives the initial investment (the negative numbers at "Year 0") for two projects. Compute the payback period, the NPV, and the IRR using Excel. Then rank the two projects based on each of these three criteria, and discuss which projects should be funded based on your computations.

Firm Cost of Capital:

11%

Year

Project A

Project B

0

-100,000

-150,000

1

25,000

30,000

2

25,000

30,000

3

25,000

90,000

4

25,000

20,000

5

25,000

20,000

6

25,000

20,000

1. The ACME Umbrella Company is deciding between two different umbrella factories. Both factories will cost $500,000 to get started. However, the cash flows for each factory will depend on whether the next five years are rainier than average or sunnier than average. Factory A will have cash flows of $130,000 per year for the next five years if the weather is sunnier than average. But if it is rainier than average the cash flows will be $150,000 per year for the next five years. Factory B will have cash flows of $100,000 per year for the next five years if it is sunnier than average, but if it is rainier than average it will have cash flows of $200,000 per year. ACME has a cost of capital of 9%. Based on this information, calculate the following:
2. Calculate the NPV for both factories and for both scenarios (rainy versus sunny). What is the range of NPV for each factory based on your scenario analysis?
3. Based on your answer to a) above, do you think ACME should use the same discount rate of 9% for each factory? Or should they use a risk-adjusted discount rate (RADR)? If so, which factory should have a higher RADR? Explain your answer with references to the background readings.
4. Your neighbor Freewheeling Franklin has a very successful new internet-based technology company. While his company has great cash flow, you see Mr. Franklin has a collection of five expensive sports cars in his newly built garage. You also see him throwing some extravagant parties every weekend where he serves expensive champagne. Based on the required background readings such as Ross, et al. (2013)., explain how you would handle the following situations:
5. Mr. Franklin asks you for a loan to help expand his business and offers you an interest rate considerably higher than you would get from leaving your money in the bank. As a lender, what measures might you take to make sure you get your money back and Mr. Franklin won't waste the money?
6. Mr. Franklin asks you to buy one-third of his company, and wants to use the money from selling this portion of the company to expand his business. As a shareholder, what steps might you take to make sure he spends his profits and the investment money you gave him wisely?
7. Suppose you own a new business and after a few rough years you now are making a solid profit of $150,000 per year and have built up some savings as well. While your business is successful, you realize that in order to expand and remain competitive you are going to have to raise a lot of money to invest in some new machinery and new stores. You have to decide between using your savings to finance your expansions and machinery upgrades, taking out a bank loan, or selling a portion of your equity to new investors. Explain the pros and cons of each of these three options in this situation, and make references to the required background readings such as Ross, et al. (2013).