BUSN 379 Week 6
Course Project Rubric
Part 2 Due at the end of Week 6
Task 4 Capital Budgeting
Compute the NPV and IRR of a project and make recommendations based on calculations
1. What is the projectÂ’s IRR?
2. What is the projectÂ’s NPV?
3. Should the company accept this project and why
4. Explain how depreciation will affect the present value of the project.
Analyze factors affecting the capital budgeting process
Examples of sunken cost, opportunity cost and erosion
Describe project risks and analysis
Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project?
Task 5 Cost of Capital
Calculate the WACC and describe methods for computing the cost of capital
1. What is the YTM of the competitorÂ’s bond? You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return.
What is the after-tax cost of debt if the tax rate is 34%?
Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.
Explain why you should use the YTM and not the coupon rate as the required return for debt.
2. What is the cost of common equity?
Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast this method with the dividend growth model approach. (10 pts)
3. What is the cost of preferred equity?
Is there any other method to compute this cost? Explain.
4. Assuming that the market value weights of these capital sources are 30% bonds, 60% common equity and 10% preferred equity, what is the weighted cost of capital of the firm?
5. Should the firm use this WACC for all projects? Explain and provide examples as appropriate.
6. Recompute the net present value of the project based on the cost of capital you found. Do you still believe that your earlier recommendation for accepting or rejecting the project was adequate? Why or why not?
