1. Argosy University ACC 420 Module 1 Assignment 3
Analyzing Capitals Expenditures NEW
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Assume that you have received a capital
expenditure request for $52,000 for plant
equipment and that you are required to do a
justification analysis using capital budgeting
techniques. The company’s cost of capital is 12%
and the equipment (investment) is expected to
generate net cash inflows of $13,000 per year for 8
years and then $9,000 for one year.
You are to calculate and explain your quantitative
calculations of each of the four capital-budgeting
techniques listed, then, based upon these
calculations, write a summary that provides a
2. justification to proceed or not proceed with the
project.
Calculate the project’s net present value (NPV).
Calculate the project’s internal rate of return
(IRR).
Calculate the project’s profitability index.
Calculate the project’s discounted payback period.
Recommend whether the project should be
accepted or rejected and explain why.
To complete this assignment, submit an Excel file
with your time value calculations, and a two-page
paper that explains the calculations and provides
your recommended decision and explanation of
why that decision is recommended.The paper
must be submitted as a Word document and it
must follow APA style guidelines.
3. Argosy University ACC 420 Module 2 Assignment 1
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Capital Rationing
4. Argosy University ACC 420 Module 2 Assignment 2
Estimating Cash Flows NEW
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Assume that your company is considering the
replacement of an automated milling machine
with one of the new machines offered by three
different manufacturers. Each of the three
machines under consideration is expected to have
an economic life of five years and will result in
greater daily production capacity and therefore
increased sales volume. The increased volume will
require an increase in working capital during the
first year to a level that will remain constant until
the end of the five years. The decision of which
specific machine to select will depend on a net
present value analysis. The old machine has
reached the end of its estimated useful life and can
5. be sold at the salvage value that was projected
when the machine was first installed.
Listed below are factors that may be essential for
inclusion when estimating project cash flows. The
factors may be required to correctly calculate the
initial investment, the operating cash flows, or the
terminal value that would be analyzed to
determine the net present value of the project. It
is also possible that certain factors could be used
in more than one of the three categories of cash
flow. Another possibility is that the factor listed is
not relevant to cash flow estimation for this
specific scenario.
Your task is to identify whether the factor would
be included in the calculation for the initial
investment, or the operating cash flow, or the
terminal value, or is not relevant to this
decision. You must also explain whether failure to
appropriately include the factor in the calculation
would result in overstating or understating the net
present value of the project.
FACTORS
Purchase price of capital asset
Incremental annual depreciation expense
6. Total company sales revenue
Cash realized from sale of the old machine at its
estimated salvage value
Interest on the loan used to finance the asset
purchase
Total annual depreciation expense
Increase in working capital
Decrease in working capital
Total net income before tax
Incremental net income before tax
Marginal income tax rate
Investment tax credit
Cost of shipping and installing the new equipment
Directions and Grading Criteria
To complete this assignment, you are to develop a
PowerPoint presentation. You should create 1-3
slides that identify the factors used to determine
the initial investment, 2-5 slides that identify the
factors used to determine the operating cash flow
7. estimates, and 1-3 slides that identify the factors
used to determine the terminal value
estimate. You must also indicate on the slides
whether failure to appropriately include the factor
in the calculation would result in overstating or
understating the net present value of the
project. Additional explanations or comments
should appear in the speaker notes for each
slide. APA standards for writing style must be
applied to the speaker notes. Factors that are not
relevant to the NPV calculation should not be
included on any slide.
8. Argosy University ACC 420 Module 3 Assignment 1
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Project Risk
9. Argosy University ACC 420 Module 3 Assignment 2
LASA 1 NPV, Sensitivity, Risk, Bias and Ethics in
Capital Budgeting NEW
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Explain your recommendation regarding whether
the project should be accepted and a justification
of your response.
Provide an explanation of how adjusting the
discount rate in the basic NPV model of capital
budgeting deals with the problem of project risk.
Examine the potential motivation for unethical
behavior by executives that may take place in the
capital budgeting process and explain how biasing
cash-flow estimates can work to the advantage of
the executive who intentionally inserts such bias.
10. Argosy University ACC 420 Module 4 Assignment 1
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Budgeting With Real Options
11. Argosy University ACC 420 Module 4 Assignment 2
The Cost of Capital NEW
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Assume that you are a member of an aerospace
company’s newly formed executive committee that
has been given the role of reviewing requests for
major capital expenditures. The committee
chairman has laid the groundwork for approving
requests that managers of various organizational
units have submitted by reminding the group that
their charge is to approve the investment
opportunities that will best meet the company’s
financial objective of maximizing shareholder
wealth.
One of the more outspoken individuals on the
committee vigorously pushed the concept that the
best way to maximize shareholder wealth would
12. be to accept all of the projects that promise a
return that is higher than the long-term interest
rates on bonds or bank loans. This same
committee member is also insistent that the
company turn to borrowed funds as needed to
augment existing funds so that all of the projects
that are attractive to the committee, and that
promise a return that is higher than the borrowing
rate, can be accepted.
Other committee members expressed concern
about that approach but the time scheduled for
adjourning the meeting arrived before the
disagreement was resolved. You have been
assigned to examine the issue and, in the spirit of
taking advantage of a teaching moment, circulate a
report that will bring all committee members to a
common understanding of the decision criteria
that should be adopted by the committee. The
chairman asked that your report address the
following questions that seemed to be present
during the committee meeting.
1. Why would the suggested approach of using the
cost of new debt as the hurdle rate probably not
result in maximizing the shareholders wealth?
13. 2. What role does the cost of capital play in the
committee’s work?
3. How might a company’s WACC be affected by
changes in the size of its capital budget?
4. When and why would it be inappropriate to use
the firm’s cost of capital as calculated on its
existing capital structure to evaluate new
investment opportunities?
5. In what situations would it be appropriate to use
the firm’s cost of capital as calculated on its
existing capital structure to evaluate new
investment opportunities?
6. For the situations in which it would be
inappropriate to use the firm’s cost of capital as
calculated on its existing capital structure to
evaluate new investment opportunities, what are
the alternatives that might be used instead as the
hurdle rate?
Prepare a 3-4 page report in which you answer the
questions as requested by the committee
chairman. Apply APA standards for writing style
to your report.
14. Argosy University ACC 420 Module 5 Assignment 1
LASA 2 Air value Airways Strategic Planning NEW
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Air value Airways is a regional carrier whose
strategy is to expand gradually as they can identify
routes that offer an attractive return on the
investment necessary to support successful
coverage of the route. As part of this expansion,
the company is planning to buy a new plane in the
upcoming fiscal year. The purchasing department
has narrowed the choice down to two models. One
is the A220 which is manufactured in Europe. The
other plane is the G435 which is built in the United
States. The two aircraft have similar profiles.
However, the locally-built G435 is significantly
more expensive to purchase.
The A220 has an expected life of 5 years, will cost
$90 million and its use will produce net operating
15. cash inflows of $30 million per year. The G435 has
a life of 10 years, will cost $128 million, and its use
will produce net operating cash inflows of $25
million per year. Air value plans to serve the route
for 10 years. When they need to purchase a new
A220 at the end of five years, the cost will be $115
million net after allowing for salvage value of the
used plane. Net operating cash inflows will remain
at $30 million throughout the second five years. At
the end of 10 years, salvage value of the G435 and
of the second A220 are expected to be about the
same at approximately $500,000 each.
As the company’s CFO you are to provide the
financial analysis that will be considered by the
strategic planning executive committee during
evaluation of this expansion alternative. Your plan
is to use a capital budgeting approach to the
analysis in order to best assure that the decision
will result in maximization of wealth for the
company’s stockholders. You also want to convert
the entire committee to the concept that capital
budgeting should be used as the main tool for the
financial analysis of capital expenditure
alternatives.
The company uses the historical difference in
returns between the S&P 500 and the Treasury
16. bond rates of 7% as their estimated market risk
premium. The current yield to maturity on a 10-
year Treasury bond is 6.2%. Air value Airways’
common-stock equity beta is estimated as 1.40.
Air value’s capital structure is 58% common stock,
32% preferred stock and 10% long-term debt. An
8.8% after tax cost of debt has been determined
and the cost of preferred stock is 12%.
Your task is to:
1. Describe for other members of the strategic
planning committee the role that capital budgeting
should play in corporate strategic management.
2. Explain why the NPV and IRR capital budgeting
tools are superior to the accounting rate of return
and simple payback techniques for determining
the attractiveness of capital investment
opportunities.
3. Use the Capital Asset Pricing Model (CAPM) to
identify the cost of common stock.
4. Calculate the weighted average cost of capital
(WACC) for the firm’s existing capital structure.
17. 5. Calculate the net present value (NPV) for each
plane model using the company’s WACC as the
hurdle rate.
6. Recommend which plane should be purchased
and justify your recommendation.
7. Discuss the need to manage implementation of
the project so that the higher returns can be
realized.
Include the strategic management keys to
protecting the project from competitive forces that
would erode the earning power of the project and
jeopardize realization of the projected rate of
return on the investment.
To complete this assignment, you must submit a 6-
8 page paper that addresses the seven elements of
the task as listed above and exhibits your
calculations of the cost of common stock, the
weighted average cost of capital, and the NPV for
each plane along with an explanation of the
calculations.
The paper must be submitted as a Word document
and it must follow APA style guidelines.
18. Argosy University ACC 420 Week 5 Assignment 2
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Memorandum
