FOR MORE CLASSES VISIT tutorialoutletdotcom CAPITAL BUDGETING CASE STUDY ANALYSIS ACME Inc. is a multinational conglomerate corporation providing a wide range of goods and services to its customers. As part of its budgeting process for the next year, it has several projects under consideration so it must decide which projects should receive capital budgeting investment funds for this year.

1. Operating Cash Flow, which is also called NOPAT in the
textbook
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CAPITAL BUDGETING CASE STUDY ANALYSIS
ACME Inc. is a multinational conglomerate corporation providing a
wide range of goods and services to its customers. As part of its
budgeting process for the next year, it has several projects under
consideration so it must decide which projects should receive capital
budgeting investment funds for this year.
As part of the financial analysis department, you have been given
several projects to evaluate. However, before you can determine the
appropriate valuations of these projects, you need to determine the
weighted average cost of capital for the firm since it is used as a
threshold of acceptability for projects.
Remember that management has a preference in using the market values
of the firm’s capital structure and believes it current structure (target
weight/market weight) is optimal.
Market Values of Capital
1. The company has 60,000 bonds with a 30-year life outstanding,
with 15 years until maturity. The bonds carry a 10 percent semi-
annual coupon, and are currently selling for $874.78.
2. You also have 100,000 shares of $100 par, 9% dividend perpetual
preferred stock outstanding. The current market price is $90.00.
3. The company has 5 million shares of common stock outstanding
with a currently price of $17.00 per share. The stock exhibits a

2. constant growth rate of 10 percent. The last dividend (D0) was
$.65.
4. The risk-free rate is currently 6 percent, and the rate of return on
the stock market as a whole is 13 percent. Your stock’s beta is
1.22.
5. Your firm only uses bonds for long-term financing.
6. Your firm’s federal + state marginal tax rate is 40%. (Ignore any
carryforward implications)
Depreciation Schedule
Modified Accelerated Cost Recovery System (MACRS)
Ownership Year 1
2
3
4
5
6
5-Year Investment Class Depreciation Schedule 20%
32%
19%
12%
11%
6%
Total = 100%
CAPITAL BUDGETING CASE STUDY ANALYSIS
Requirements

3. Each Student will be provided two (2) projects which they will evaluate.
Students are expected to report the results of their analysis in Week 6 in
a PowerPoint slides presentation. Groups will also submit spreadsheet
work for all sections. Calculations for all parts will be graded in the
spreadsheet score in Week 6.
Capital Budgeting Assignment – Part 1
Section 1 (10% of total grade)
Find the costs of the individual capital components:
• long-term debt (before tax and after tax)•
• preferred stock•
• • average cost of retained earnings (avg. of Capital Asset Pricing
Model & Gordon Growth Model/Constant Growth Model) Section
2 (15% of total grade) Determine the target percentages for the
optimal capital structure, and then compute the WACC. Carry
weights to a minimum of four decimal places, but rounding in
calculations is not necessary. (i.e. 0.2973 or 29.73%) Section 3,
Part 1 (30% of total grade) Select one (1) of the projects
assignment and create a valuation spreadsheet for the project
provided by your instructor. You should use your Use the
spreadsheet template provided to structure your valuation analysis.
Evaluate each project according to the following valuation
methods:
o Net Present Value of Discounted Cash Flow (use WACC
number for discount rate)•
o Internal Rate of Return•
o Payback Period•
o Profitability Index (use WACC number for discount rate)•

4. CAPITAL BUDGETING CASE STUDY ANALYSIS Capital
Budgeting Assignment – Part 2
Section 3, Part 2 (30% of total grade)
Create valuation spreadsheets for both projects and/or revise your
valuation based on Part 1 completion. Use the spreadsheet template
provided to structure your valuation analysis. Evaluate each project
according to the following valuation methods:
• Net Present Value of Discounted Cash Flow (use WACC number
for discount rate)•
• Internal Rate of Return•
• Payback Period•
• Profitability Index (use WACC number for discount rate)•
Provide a synopsis evaluation of each project and provide a clear
recommendation of which project management will accept for its
capital expenditures budget based on textbook decision rules.
Section 4 (15% of total grade) Create a second valuation
spreadsheet of the projects provided by your instructor. This
should measure the sensitivity of the project as reflected by a 10%
reduction in price. Evaluate both projects according to the
following valuation method:
Net Present Value of Discounted Cash Flow (use WACC number for
discount rate)•
Provide a synopsis evaluation of each project and provide a clear
recommendation of which project management will accept for its capital
expenditures budget based on textbook decision rules.
Section 5 (15% of total grade)

5. Create a third valuation spreadsheet of the projects provided by your
instructor. This should measure the sensitivity of the project as reflected
by a 10% reduction in sales volume. Evaluate both projects according to
the following valuation method:
Net Present Value of Discounted Cash Flow (use WACC number for
discount rate)•
Provide a synopsis evaluation of each project and provide a clear
recommendation of which project management will accept for its capital
expenditures budget based on textbook decision rules.
Section 6 (15% of total grade)
Provide an evaluation of all the analyses from the previous sections and
explain the implication of sensitive analysis on pro forma estimates of
future projects. Discuss the benefits and limitations of this analysis and
how it could be used in the professional environment.
CAPITAL BUDGETING CASE STUDY ANALYSIS
Project A:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $130,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $250,000. The project will last 6 years at which time
the market value for the equipment will be $150,000.
The project will project a product with a sales price of $20.00 per unit
and the variable cost per unit will be $10.00. The fixed costs would be
$200,000 per year. Because this project is very close to current products
sold by the business, management has expressed some favoritism
towards this project and as allowed for a reduced rate of return of 2

6. percentage point below its current WACC as the valuation hurdle it must
meet or surpass.
Project B:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $100,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $70,000. The project will last 6 years at which time
the market value for the equipment will be $50,000.
The project will project a product with a sales price of $40.00 per unit
and the variable cost per unit will be $15.00. The fixed costs would be
$150,000 per year. Because this project is not close to current products
sold by the business, management wants adjust the risk profile of this
analysis by imposing a 2 percentage point increase over the firm’s
WACC.
Project C:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $50,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $120,000. The project will last 6 years at which time
the market value for the equipment will be $200,000.
The project will project a product with a sales price of $30.00 per unit
and the variable cost per unit will be $10.00. The fixed costs would be
$100,000 per year. Because this project is very close to current products
sold by the business, management wants you to apply the WACC as the
discount rate to the project.
Years 2014 2015 2016 2017 2018 2019

7. Forecasted Units Sold 70,000 100,000 65,000 70,000 65,000 55,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 50,000 60,000 70,000 80,000 90,000 80,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 30,000 40,000 50,000 60,000 70,000 80,000
CAPITAL BUDGETING CASE STUDY ANALYSIS
Project D:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $200,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $125,000. The project will last 6 years at which time
the market value for the equipment will be $20,000.
The project will project a product with a sales price of $25.00 per unit
and the variable cost per unit will be $12.00. The fixed costs would be
$350,000 per year. Because this project is not similar to current products
sold by the business, management wants to impose a 3 percentage point
premium on its current WACC as the valuation hurdle it must meet or
surpass.
Project E:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $100,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net

8. working capital by $200,000. The project will last 6 years at which time
the market value for the equipment will be $100,000.
The project will project a product with a sales price of $22.00 per unit
and the variable cost per unit will be $10.00. The fixed costs would be
$250,000 per year. Because this project is very close to current products
sold by the business, management want to use the current WACC as the
valuation hurdle it must meet or surpass.
Project F:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $100,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $230,000. The project will last 6 years at which time
the market value for the equipment will be $0.
The project will project a product with a sales price of $20.00 per unit
and the variable cost per unit will be $7.00. The fixed costs would be
$300,000 per year. Because this project is very close to current products
sold by the business, management has expressed some favoritism
towards this project and as allowed for a reduced rate of return of 4
percentage point below its current WACC as the valuation hurdle it must
meet or surpass.
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 70,000 100,000 65,000 70,000 65,000 55,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 100,000 90,000 80,000 70,000 60,000 50,000
Years 2014 2015 2016 2017 2018 2019

9. Forecasted Units Sold 80,000 80,000 80,000 80,000 80,000 80,000
CAPITAL BUDGETING CASE STUDY ANALYSIS
Project G:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $200,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $40,000. The project will last 6 years at which time
the market value for the equipment will be $10,000.
The project will project a product with a sales price of $95.00 per unit
and the variable cost per unit will be $40.00. The fixed costs would be
$450,000 per year. Because this project is very different to current
products sold by the business, management has imposed a 2.5
percentage point premium above its current WACC as the valuation
hurdle it must meet or surpass.
Project H:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $100,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $80,000. The project will last 6 years at which time
the market value for the equipment will be $10,000.
The project will project a product with a sales price of $100.00 per unit
and the variable cost per unit will be $45.00. The fixed costs would be
$550,000 per year. Because this project is very different to current
products sold by the business, management has imposed a 3 percentage

10. point premium above its current WACC as the valuation hurdle it must
meet or surpass.
Project I:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $250,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $100,000. The project will last 6 years at which time
the market value for the equipment will be $30,000.
The project will project a product with a sales price of $120.00 per unit
and the variable cost per unit will be $65.00. The fixed costs would be
$500,000 per year. Because this project is very different to current
products sold by the business, management has imposed a 2 percentage
point premium above its current WACC as the valuation hurdle it must
meet or surpass.
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 20,000 50,000 40,000 30,000 20,000 10,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 19,000 45,000 38,000 32,000 18,000 12,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 21,000 55,000 44,000 28,000 25,000 11,000
CAPITAL BUDGETING CASE STUDY ANALYSIS
Project J:

11. This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $50,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $150,000. The project will last 6 years at which time
the market value for the equipment will be $120,000.
The project will project a product with a sales price of $20.00 per unit
and the variable cost per unit will be $8.00. The fixed costs would be
$220,000 per year. Because this project is very close to current products
sold by the business, management has expressed some favoritism
towards this project and as allowed for a reduced rate of return of 2
percentage point below its current WACC as the valuation hurdle it must
meet or surpass.
Project K:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $150,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.
Once the equipment is installed, the company will need to increase net
working capital by $90,000. The project will last 6 years at which time
the market value for the equipment will be $60,000.
The project will project a product with a sales price of $35.00 per unit
and the variable cost per unit will be $15.00. The fixed costs would be
$200,000 per year. Because this project is not close to current products
sold by the business, management wants adjust the risk profile of this
analysis by imposing a 2 percentage point increase over the firm’s
WACC.
Project L:
This project requires an initial investment of $2,000,000 in equipment
which will cost an additional $75,000 to install. The firm will use the
attached MACRS depreciation schedule to expense this equipment.

12. Once the equipment is installed, the company will need to increase net
working capital by $100,000. The project will last 6 years at which time
the market value for the equipment will be $180,000.
The project will project a product with a sales price of $32.00 per unit
and the variable cost per unit will be $11.00. The fixed costs would be
$110,000 per year. Because this project is very close to current products
sold by the business, management wants you to apply the WACC as the
discount rate to the project.
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 72,000 95,000 70,000 63,000 61,000 52,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 55,000 65,000 75,000 85,000 95,000 85,000
Years 2014 2015 2016 2017 2018 2019
Forecasted Units Sold 32,000 45,000 48,000 58,000 75,000 90,000