CAPITAL BUDGETING AND THE COST OF CAPITAL ( Case Assignment)

Module 3 – CaseCAPITAL BUDGETING AND THE COST OF CAPITALAssignment OverviewBefore starting on this assignment, make sure to thoroughly review the required background materials. Make sure you fully understand both the basic concepts as well as how to calculate payback period, NPV, IRR, and WACC. Submit your answers in a Word document. Make sure to show your work for all quantitative questions and fully explain your answers using references to the background readings for any conceptual questions. Questions 1 and 2 will require Excel. Attach an Excel file to show your computations for Questions 1 and 2. Case AssignmentThe table below gives the initial investment and expected cash flows over the next five years for two different projects. Assume that the industry you are in expects a return of 10%, which you use as the discount rate in net present value (NPV) calculations and as the required rate of return for purposes of deciding on projects. Also, assume that management only wants to invest in projects that pay off within four years.For each project, compute the payback period, NPV, and internal rate of return (IRR). Then explain whether each project should be accepted based on these three criteria.Project AProject BInitial Investment$40,000$28,000YearCash Flows1$10,000$10,0002$10,000$13,0003$10,000$5,0004$10,000$5,0005$10,000$6,0002. Suppose you are planning on becoming a vendor at the arena where your favorite sports team plays. You are trying to decide between opening up a souvenir stand selling T-shirts, caps, etc., with your sports team’s logo or opening up a hot dog and beer stand. It is more expensive to open up the hot dog and beer stand because you need to purchase a license to serve alcohol and you need to spend money to comply with health department regulations. Revenue from the souvenir stand is likely to be unpredictable because fans of your favorite team tend to want to purchase hats and T-shirts only when the team is winning. Revenue from hot dogs and beer seem to be a little more steady since fans want to eat and drink regardless of whether the team is winning.Below is a table with the initial investment cost of each type of stand and the annual payments you expect over the next five years. The annual payments will be different depending on how well your team does. Therefore, you will estimate how much cash flow you will get depending on whether your team does better than expected (optimistic), the same as the past few years (most likely), and worse than expected (pessimistic). Use a discount rate of 8%.Based on the table below, answer the following items:A. Calculate the net present value (NPV) for each type of stand under each of the three scenarios. Calculate the range of possible NPV values for each type of stand.B. Based on your answer to A) above and your own guesses about how well you think your favorite team will do over the next five years, which type of stand would you rather invest in?Souvenir StandHot Dog and Beer StandInitial Investment$100,000$150,000 Annual Cash Inflows (5 Years)Outcome Pessimistic$30,000$50,000 Most likely$50,000$60,000 Optimistic$70,000$70,0003. Suppose you are a corn farmer in your home state. You have to decide between two projects. One project is to purchase new equipment for your farm that will help boost your profits for the next 10 years. You also find out that you can purchase a large banana farm in Brazil for the same price as the equipment, and at the current market price for bananas you will make a lot more profit than you would from purchasing new corn farming equipment.After asking around, you find out that the standard discount rate for evaluating the NPV of the farming project is 6%. Most farmers in your home state seem to use this rate successfully. However, you don’t know any other banana farmers and you don’t know too much about farming in Brazil, so you have to make a guess on an appropriate discount rate for the Brazilian banana farm. Based on the concepts from the background readings, would you say the Brazilian banana farm will need a lower or higher discount rate? A lot larger or smaller, or only a little?4. Calculate the following:a. The cost of equity if the risk-free rate is 2%, the market risk premium is 8%, and the beta for the company is 1.3.b. The cost of equity if the company paid a dividend of $2 last year and is expected to grow at a constant rate of 7%. The stock price is currently $40.c. The weighted average cost of capital (WACC) if the company has a total value of $1 million with a market value of its debt at $600,000 and a market value of its equity at $400,000. Its cost of debt is 6% and its cost of equity is 15%. The tax rate it pays is 25%.5. Suppose you own a chain of dry cleaners and the WACC you’ve been using to make decisions on new purchases of dry cleaning equipment is a steady 9%. Recently, gambling has been made legal in your home town so you decide to expand and open up a casino. Should you use the same WACC to evaluate purchases of casino equipment? Why or why not? What are some alternatives to using the same WACC to make decisions on casino equipment? Explain your reasoning, and make references to concepts from the background readings. Assignment ExpectationsAnswer the assignment questions directly.Stay focused on the precise assignment questions. Do not go off on tangents or devote a lot of space to summarizing general background materials.For computational problems, make sure to show your work and explain your steps.For short answer/short essay questions, make sure to reference your sources of information with both a bibliography and in-text citations. See the Student Guide to Writing a High-Quality
Academic Paper, (See Attached) including pages 11-14 on in-text citations.
·
APA Citation
Reference credible sources only
The following resources are not acceptable for
this course, keep in mind, there are many others:

Wikipedia.com
Ehow.com
About.com
Smallbusiness.chron.com
Diffen.com
Yourbusiness.azcentral.com
Investopedia.com
Boundless.com and Lumen
Course hero
Chegg
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Rubric Name: MBA/MSHRM/MSL Case Grading Rubric for Quantitative Business Courses Timeliness v1
Criteria
Level 4 – Excellent Level 3 – Proficient Level 2 – Developing Level 1 – Emerging
19 points
Assignment-Driven
Criteria
Critical Thinking
16 points
17 points
9 points
Demonstrates
Demonstrates partial limited or poor
proficiency covering proficiency
all key elements of
covering all key
the assignment.
elements of the
assignment.
7 points
8 points
Demonstrates
mastery in
presenting
quantitative
information in a
format appropriate
for the discipline.
Supporting
computations are
relevant and
accurate.
Demonstrates
considerable
proficiency in
presenting
quantitative
information in a
format appropriate
for the discipline.
Supporting
computations are
mostly relevant and
accurate.
Demonstrate partial
proficiency in
presenting
quantitative
information in a
format appropriate
for the discipline.
Supporting
computations are not
necessarily relevant
and somewhat
misleading.
10 points
9 points
8 points
Demonstrates
mastery covering
all key elements of
the assignment in a
substantive way.
10 points
Presentation,
Computation, and
Relevance of
Quantitative
Information
18 points
Demonstrates
considerable
proficiency
covering all key
elements of the
assignment.
Demonstrates
limited or poor
proficiency in
presenting
quantitative
information in a
format appropriate
for the discipline.
Supporting
computations are
not relevant,
misleading or
absent.
7 points
Analyzes
Analyzes
quantitative and
quantitative and
qualitative
qualitative
information as the
information as the
basis for deep and basis for competent
thoughtful
and thoughtful
discussion, drawing discussion, drawing
insightful, carefully
reasonable and
qualified
appropriately
conclusions from
qualified
this work.
conclusions from
this work.
6 points
5 points
Analyzes quantitative
and qualitative
information as the
basis for
workmanlike
(without inspiration
or nuance, ordinary)
discussion, drawing
plausible conclusions
from this work.
Analyzes
quantitative and
qualitative
information as the
basis for tentative or
limited discussion;
and is hesitant or
uncertain about
drawing conclusions
from this work.
3 points
4 points
Business Writing
Timeliness
Demonstrates
mastery and
proficiency in
written
communication to
an appropriately
specialized
audience.
5 points
Assignment
submitted on time
or collaborated
with professor for
an approved
Demonstrates
considerable
proficiency in
written
communication to
an appropriately
specialized
audience.
3 points
Assignment
submitted 1-2 days
after module due
date.
Demonstrates
limited or poor
Demonstrate partial
proficiency in
proficiency in written
written
communication to an
communication to
appropriately
an appropriately
specialized audience.
specialized
audience.
2 points
0 points
Assignment
submitted 3-4 days
after module due
date.
Assignment
submitted 5 or more
days after module
due date.
extension on due
date.
Overall Score
Close
Level 4
45 or more
Level 3
40 or more
Level 2
35 or more
Level 1
0 or more
Student Guide to Writing
a High-Quality Academic Paper
Follow these guidelines when writing academic papers,
including your Case and SLP assignments.
?
An effective academic writing style is an essential part of a
university education.
?
Poorly written papers detract from your ability to effectively share
your knowledge and ideas with others, including your professors.
?
This guide will help you prepare high-quality papers that are:
? Logically argued
? Clearly structured and formatted
? Written in a professional, academic style
The basic structure of an academic paper includes:
2
1. Cover page 2. Introduction 3. Body of the
paper (which may have subsections) 4.
Conclusion 5. Reference page
??The
cover page of an academic paper should
include the:
? University name ? Student’s name ?
Assignment title ? Course number and name
? Professor’s name ? Date
??Note:
Some professors recommend adding the assignment instructions
(tasks and/or questions) to the bottom of the cover page to help students
make sure they have addressed each part of the assignment.
3
University Name
Student’s Name
Module 1 Case Assignment
Course Number: Course Name
Professor’s Name
Date
In the introduction, provide a brief, clear overview of:
1.
Each problem or issue that you will discuss
2.
The solution to the problem(s) or your response to the
issue(s)
4
3.
How you will prove or demonstrate that your solution or
response is correct
Tip: Try writing the body of your paper first. Then come back
and write the introduction once you know what your paper is
about.
5
?
The body of the paper is where you discuss the solution to the problem(s)
or your response to the issue(s) raised in the assignment.
?
After you have read the materials related to the assignment, begin by
creating a quick outline:
? What are the main points of your argument? Jot them down.
? Depending on the length of the paper, 3–6 main points should be
plenty.
? If a point is complex, it may have 2 or 3 sub-points. Jot those down as
well.
? Now arrange those points in a logical sequence.
? Which point needs to be made first because it provides a basis
for the points that follow?
6
? For example, “Point A leads to point B, which leads to point C, and
when A, B, and C are considered together they mean that the
solution is point D.”
Example of the structure of a Case Assignment that requires 4 pages of
text
(not including the cover page, and not including a reference page for assignments that require one):
Main Sections
Points
Sub-points
Page #
# of Paragraphs
1
1
Point A
1
1
Point B
2
1
Cover Page
Introduction
Body of Paper


Sub-point 1
2
1

Sub-point 2
3
1
7

Point C
3
1

Point D
4
2
4
1
Conclusion
Reference Page
In the body of your paper:
?
Use headings and subheadings to help your reader follow the points and subpoints in your discussion and to better organize sections and subsections.
?
Give each point and sub-point a short name that tells your reader what that section
is about. Use those names for your headings.
?
Here is a quick “how-to” guide to headings with links to examples and instructions:
http://blog.apastyle.org/apastyle/2011/04/how-to-use-fivelevels-of-heading-in-anapa-style-paper.html
?
Now you are ready to begin writing the body of your paper.
8
? Discuss one point at a time and explain each point clearly.
? Discuss one point or sub-point in each paragraph.
? As you advance to writing more complex papers (e.g., upper-division
undergraduate or master’s-level assignments), it may take 2 or 3 paragraphs to
fully develop and support a point.
9
In the body of your paper:
?
Each paragraph should be made up of approximately 3–5 sentences. (Note: A
single sentence is not a paragraph. Break long sentences into 2 or 3 shorter
ones.) ??Each paragraph should include:
? The point or focus of that paragraph in the first sentence
? Additional sentences in which you explain, elaborate, and support your point
(see section on Supporting Your Points that begins on the next slide)
? A conclusion/transition to the next point and paragraph
?
Each point should be supported by citing and referencing the sources that provide
the foundation for your solutions and/or responses. How to do this will be
discussed on the next slide.
Supporting Your Points
?
What makes an academic paper “academic”? How does an academic
10
paper differ from other types of writing—for example, a short story, a blog, a
newspaper article, a business letter, or an e-mail message?
?
In an academic paper:
?
You must provide support for each idea, statement, or point that you make that
is based on someone else’s ideas.
?
Support is provided through citations and references. (References are
discussed beginning on Slide 17.) Citations appear within the paper itself
wherever you draw upon another person’s ideas or another source of
information. References are listed on a separate page at the end of your
paper.
?
Each citation refers to a specific reference so that your reader can look up the
sources of your support and read them for himself or herself.
?
Citations are short and usually only include the author’s last name and the
date of publication of the author’s work, for example, “In a study of K–12
education, Jones (2013) found that…”
11
Citation Examples
?
?
You can cite at the beginning or ending of a sentence:
?
According to Jones (2007), a reason for poor student performance is large
classroom size.
?
Student performance decreases as classroom size increases (Jones, 2007).
When multiple sources support your point, cite them together in alphabetical order
at the end of the sentence:
?
Educators agree that large classroom size decreases student performance
(Adams, 2005; Jones, 2007; Smith, 2008).
?
When a source is written by more than one person, give their last names in the
citation at the end of the sentence, like this: (Smith, Adams, & Jones, 2006).
?
When there is no author and/or no date (e.g., a Web page), see this example:
http://www.apastyle.org/learn/faqs/web-page-no-author.aspx
12
Do not spell out the titles and publication details of your sources in the body of your
paper. Instead, provide a short citation, and add a full reference with the publication
details in your reference list. Interested readers can then find the details about the article
in your reference list at the end of your paper.
Wrong:
The first article that will be discussed is called “The Very Separate Worlds of Academic
and Practitioner Periodicals in Human Resource Management” written by Sara Rynes,
Tamara
Giluk, and Kenneth Brown, which was published in the Academy of Management Journal
(2007) Vol 50, No.5, 987-1008. They studied the gap between academic and practitioner
knowledge.
? Note: Do not spell out the title and publication details of your sources in the text. Right
?
(two different ways):
1.
Rynes, Giluk, and Brown (2007) found a gap between academic and practitioner
knowledge.
?
Note: The authors are the subject of the sentence. This is referred to as an “in-text citation” and
includes just the authors’ last names and year of publication.
13
A gap was found between academic and practitioner knowledge (Rynes, Giluk, & Brown,
2007).
2.
?
Note: The citation is placed at the end of a sentence in parentheses. This is called a
“parenthetical citation.” In this type of citation, use an ampersand (&) instead of “and.”
When should you cite a source?
? When you use your own words in referring to the ideas or concepts of others
?
When you use the exact words that are written in one of the sources that you read
?
Using someone else’s exact words is called a “quotation.”
?
For quotes of less than 40 words, use quotation marks and follow the quote with a
parenthetical citation that includes:
? The name(s) of the author(s)
? The year of publication
? The page number the quote was taken from in the original source— for
example:
14
“Academic and practitioner periodicals in human resource management are
worlds apart” (Rynes, Giluk, & Brown, 2010, p. 992).
?
Any phrase or quote of 40 or more words should be separated from the text of
your report by single spacing and by indenting from the both right and left margin.
This is called an “offset quote.”
Provide Support for Each of Your Points
?
Scholarly academic work builds on previous knowledge and recognizes the contributions that others
have made to knowledge.
?
Providing a citation for each source of information that you use is necessary for at least four
reasons:
?
To help your reader understand the foundational information that you used to support your
points.
?
To give credit to sources of knowledge and the work of others.
?
To protect the source. If you make a good point but don’t cite your sources or indicate direct
quotes with quotation marks, the reader will attribute it to you by default.
15
?
?
To avoid plagiarism. Incorporating material from outside sources (whether direct quotes or
paraphrasing) without proper identification or citation is a form of plagiarism. Never represent
the work of another as your own.
Here is an excellent guide to help you understand plagiarism and how to avoid it (students are
strongly encouraged to study it carefully):
University Libraries, University of Missouri (n.d.). Plagiarism Tutorial. Retrieved March 1, 2013,
at http://lib.usm.edu/legacy/plag/plagiarismtutorial.php
?
In your conclusion:
?
Summarize your argument regarding the solutions/responses that
you discussed in the body of your paper, including the most
important points you made and how they relate to your overall
conclusion.
16
?
Do not discuss or raise new issues in the conclusion.
?
Limit the conclusion to 1 or 2 paragraphs.
?
The reference section, found at the end of the paper, is an alphabetical list of the
sources that you used to write your paper.
?
Center the word “References” at the top of a new page.
?
Starting on the same page, enter a full reference for each citation in your paper. Provide
only one reference for each source no matter how many times you cite it in your paper.
?
Each reference should include the following information (so readers can find the
source):
? Author’s last name, first initial, middle initial
? Year of publication
? Title of the article, book, or Web page
17
? Title of the publication where the article was found (If the article is from a
journal or newspaper, include the volume and issue number, and the pages
where the article is located.)
Reference section formats for different types of sources:
?
Article on a Web page with no date:
? Author last name, first initial, middle initial (publication date). Title of the article. Retrieved
X date from http://
? Example (note that the second line of the reference is indented five spaces):
Dvoretsky, D. P. (n.d.). History: Pavlov Institute of Physiology of the Russian Academy of
Sciences. Retrieved March 1, 2013, from http://www.infran.ru/history_eng.htm
?
Online newspaper article:
? Author name (year, month, day of publication). Article title. Newspaper Title. Retrieved X
date from http://
? Example (note that the second line of the reference is indented five spaces):
Hilts, P. J. (1999, February 16). In forecasting their emotions, most people flunk out. The New
York Times. Retrieved March 1, 2013, from http://www.nytimes.com
?
Academic Journal Article:
? Author name, first initial, middle initial (publication year). Article title. Journal Title, vol.
18
#(issue #), page numbers where the article was found.
? Example (note that the second and third lines of the reference are indented five spaces):
Shapiro, D., Kirkman, B., & Courtney, H. (2007). Perceived causes and solutions of the
translation problem in management research. Academy of Management Journal, 50(2), 249266.
?
Book: Author name (publication year). Book Title. Location: Publisher.
? Example: Fitzgerald, S. P. (2002). Decision Making. London: Capstone Publishing, Ltd.
Reference Page Example
References
Allen, G. (1998). Motivating Supervision. Retrieved March 1, 2013, from:
http://www.businessballs.com/mcgregoryxytheorydiagrm.pdf
Chapman, A. (n.d.). Adam’s Equity Theory. Retrieved March 1, 2013, from:
http://www.businessballs.com/adamsequitytheory.htm
Chapman, A. (n.d.). Herzberg’s Motivation Theory. Retrieved June 1, 2009, from:
http://www.businessballs.com/herzberg.htm
Dreyfack, R. (2004, May). Personalizing productivity. Supervision, 65(5), 20-22.
19
Shapiro, D., Kirkman, B., & Courtney, H. (2007). Perceived causes and solutions of the
translation problem in management research. Academy of Management
Journal,
50(2), 249-266.
Notes:
?
“n.d.” = no date. Use this for the date when there is no publication date available.
?
First line of each reference is at the left margin, and each subsequent line in that
same reference is indented 5 spaces (one tab stop).
?
Arrange references alphabetically based on last name of the first author of each work.
20
?
Add an appendix after the reference page when you have supplemental
material (e.g., a chart, table, diagram, or picture) that you refer to in your
paper.
?
Appendices are optional and depend upon the nature of the assignment.
?
Appendices (if any) should be placed at the end of the paper and identified
with capital letters (e.g., Appendix A).
?
The title of the appendix should be placed immediately below the appendix
label.
?
The appendix label and title should be centered at the top of the page, as in
the example below:
Appendix
A
Workflow Diagram
21
?
When professors ask you to “follow APA style” or “use APA format,” they are
referring to the Publication Manual of the American Psychological Association, Sixth
Edition.
?
APA is one of several styles that is used for writing academic papers (MLA is
another) and includes extensive details about how to format citations and references.
?
APA format is required for doctoral students and recommended for University
master’s and undergraduate students.
?
APA helps to provide a common, standard format for academic scholars to follow.
?
For additional information and guidance on APA style, here are two excellent
resources:
?
The APA Style website at http://www.apastyle.org (see the links and tutorials at the
bottom of the Web page)
?
The Purdue Online Writing Lab (http://owl.english.purdue.edu/owl/resource/560/01/)
contains extensive, detailed guidance not only on APA format, but also on general
22
writing, job search writing, and research writing (see the tabs at the top of the Web
page).
Set up your paper as follows:
?
Set 1-inch margins on all four sides.
?
Use 12-point type throughout; don’t use different type sizes.
?
Double-space the text throughout the paper, including the reference page.
?
Do not put extra spaces between paragraphs or between headings and
paragraphs.
?
Use italics or bold for emphasis, but use them sparingly or it becomes too
distracting for your reader.
23
Before you submit your assignment:
?
Re-read the assignment instructions and make sure you addressed
each one in your paper.
?
Always run spelling and grammar check in MS Word before submitting
your assignment.
?
If you struggle with grammar, or have trouble with sentence and paragraph
structure, invite a classmate or colleague with strong English writing skills
to proofread your work prior to submission. This process will improve your
writing skills.
?
Also, consult the Purdue Online Writing Lab (OWL) for writing guidance and
examples.
?
Don’t expect overnight miracles. Writing and editing are iterative processes
that take ongoing practice, feedback, refinement, and attention to detail—
24
even for the best writers. Your writing will improve as you advance through
the program!
25
26

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