Once again, your team is the key financial management team for your company.
The company's CEO is now looking to expand its operations by investing in new property, plant, and equipment.calculate the WACC for your company(Costco), which will now be useful in evaluating the project's effectiveness.
You are now asked to do some capital budgeting analysis that will determine whether the company should invest in these new plant assets.
The parameters for this project are:
Your team will be using the same company (Costco) for this project
The company is now looking to expand its operations and wants you to do some analysis using key capital budgeting tools to do this. The parameters for this project are as follows.
The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm's balance sheet.)
The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost.
The annual EBIT for this new project will be 18% of the project's cost.
The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use 35% as the tax rate in this project.
The hurdle rate for this project will be the WACC that you are able to find on a financial website.
Deliverable for this Project
Prepare a Financial repotthat will highlight the following items.
• Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project
• Your calculations that convert the project's EBIT to free cash flow for the 12 years of the project.
• The following capital budgeting results for the project
o Net present value
o Internal rate of return
o Discounted payback period.
• Your discussion of the results that you calculated above, including a recommendation for acceptance or rejection of the project