Finance Assignment
RUNNING HEAD: TEAM 1 TASK 3 1
TEAM 1 TASK 3 4
TASK 3
Team 1:
Adetolani Adeosun
Lawrence Henderson
Ayoub Mfinanga
Brittany Raines
Matthias Wurster
Memo to CFO
Executive Summary:
This presentation will present the undertaking the board necessary leadership process inside ACME Iron. It considers any necessary money related to anticipating capital structure and Weighted Average Cost of Capital (WACC) for the organization also. A case of how undertakings are approved and picked dependent on the average return for the venture will be shown in the paper. We will talk about keeping the hazard at an adequate dimension and giving expected returns, which will enable ACME to accomplish more tasks and develop at a quicker rate. Finally, the paper will break down and finish up the significant need to alter money streams and record for expansion, cost of capital and opportunity costs inside venture the executives when taking a gander at outside factors. Any investigation without outside factors may prompt choices being made on tasks that do not increase the value of ACME Iron.
Addition to Executive Summary:
In this analysis, we take a look at the profitability of the potential new loading ramp project. We primarily used net present value to discount the new cash flows it will provide back to the present. We took our Weighted Average Cost of Capital (WACC) of 10% into account as the discount rate and also considered the tax implications of the investment and subsequent savings. The analysis showed an NPV of $91,307.96, so with this positive NPV the project should be accepted. Please note, the discounted payback period is 17.89 years, so this project will not truly become profitable for a long time. That being said, the project will indeed make money over the life of the plant and should be funded.
It is important to use WACC in order to make decisions on capital projects. We were given a project opportunity to construct a new loading ramp for Acme’s single iron mill. The initial cost of the investment is $1 million. Efficiencies from the new ramp are expected to reduce costs by $100,000 for the life of the plant which is currently estimated at another 30 years. Based on an after-tax cost of debt of 8% and a cost equity of 12%, the WACC for this particular project is 10%. This is assuming that debt and equity are funded equally, both at 50%.
WACC (Discount Rate) Calculation:
WACC = We*Re + Wd*Rd*(1-T) =
WACC= We*Re + Wd*(after-tax cost of debt)
= 0.5*0.12 + 0.5*0.08 = 0.06 + 0.04 = 0.10 or 10%
We are able to use the WACC as the discount rate to determine if the NPV is positive or negative.
NPV Analysis
See attached spreadsheet
https://docs.google.com/spreadsheets/d/1DfgXjJBqXTXRGpA0lBu2_rmo_3oV_Rw8I5BgBuL1AUA/edit?usp=sharing
Conclusion:
Based on the information provided, we came to the conclusion that the WACC for ACME Iron is 10%. Using the simple/general payback period, the project we evaluated will take ten years to recover the initial investment. However, if we take taxes and discount rates into consideration, the project has a payback period of 17.89 years. Normally, if there is a positive NPV, a project will be accepted and if there is a negative NPV, the project will be rejected. In our analysis of NPV, we determined that the NPV of the proposed loading ramp is $91,307. Since we have a positive NPV, the project will be accepted. With this, two things should be noted. First, the large discounted payback period means the ramp will not be truly profitable for a long time, though our analysis does indeed show that it will be profitable over the life of the plant. Secondly, this analysis assumes no loss in opportunity costs. If another project involving the ramp presents itself, another analysis will need to be conducted. With all this in mind, we recommend moving forward with the proposed ramp project.