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Business Essay

1076 words - 5 pages

Finance Management
March 08, 2014
Rodney Schilling
Argosy University
Professor Charlie Merritt

Argosy wheel industries are considering a three year expansion project. The Schilling Group is hired to evaluate the progression which involves long term opportunities for investment. We will provide a comprehensive report that outlines and illustrates several techniques that will show and evaluate capital projects, methods used for project selection, weighted average cost to the firm and the cash flow that is anticipated for the project. We will also incorporate the risk into the calculations from two projects. In this report we explain our findings ...view middle of the document...

Dpn = (C-R) /N.” (Block 2009). With the project costing $1.5 million the estimated revenue is $1.2 million per year pre tax of this project, with an additional $600,000 annual cost. This project has no salvage value and the Marginal Tax Rate is 35%.
Argosy Wheels just paid a $2.50 dividend per share with the dividends to grow at a expected, constant of 6% per year forever. Their stock is currently selling for $50.00 per share and the flotation rate of 10%. The new cost of equity for the firm is:
New cost of equity. A. Cost of New Equity = {[Do(1+g)]/(r-g)}={[2.50(1+.06)]/($50-5)}+6%= 11.89%
Argosy Wheel is considering using debt in its capital structure at the market rate of 5%. The after tax cost for this debt for the firm is:
Solution: Cost of new debt = 5%)1=tax rate) = 5%(.65)=3.25%
Argosy Wheel has decided on a capital structure consisting of 30% debt and 70% new common stock. The WACC is used to calculate Argosy Wheel cost of capital in all category of capital and that it is proportionately weighted; all equal this is a higher risk. The overall return to the Argosy Wheel if used internally by the directors to determine the economic and cost worthiness of the expansion opportunities. This is an appropriate discount rate to use cash flow with risk to the over all firm.
Solution: WACC = 11.89%(.7)+3.25%(.3)=9.30%
The after tax cash flow calculation for Argosy Wheel project for each year is:
Revenue = $1,200,000
Depreciation = 500,000
Other Cost = 600,000
Total Cost =1,100,000
Net income before tax = $100,000
Tax at 35% = 35,000
Net income after tax = $ 65,000
Depreciation = 500,000
Net operation cash flow = $ 556,000
Depreciation cash flow = 1,500,000/3 years = $500,000 per year
If the discount rate were 6% calculated the NPV of the project. Is this economically acceptable for Argosy Wheel to undertake?
Solution: Net Present Value, NPV = -Initial investment + Cash Flow each year (PVIFA)
NPV = -$1.5 million + $565,000(2.673) = -$1.5 million + $1,510,245
= $10,245
This is a positive, so it is acceptable NPV

Calculating for IRR
Payment = 556,00, N = 3, PV = -1,500,000, CPT Solution = 6.369%
IRR = 6.37%
This is a acceptable since IRR is above the 6% no conflict between NPV


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