Jupiter Inc. is a leading manufacturing company that specializes in producing high-quality electronics. The company has experienced

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Question:

Jupiter Inc. is a leading manufacturing company that specializes in producing high-quality electronics. The company has experienced significant growth in recent years and is now considering investing in a new production system to further enhance its manufacturing capabilities. This decision is crucial for the company's future success, and Chris, a financial analyst, has been assigned to analyze the alternatives and provide recommendations.

System A:

System Aisahighlyautomated, computer-controlled productionsystemthatutilizes cutting- edge technology. It offers advanced features such as real-time data analytics, predictive maintenance, androboticassembly lines. ImplementingSystemAwouldrequireasubstantial initial investment due to the high costs associated with the state-of-the-art technology and equipment. However,itisexpected to streamlineoperations, optimize productionefficiency, and deliver superior productquality. Chris estimates thatSystem A would generatesignificant cash inflows over its useful life.

System B:

On the other hand, System B is a less expensive production system that utilizes standard technology. While it lacks the advanced features of System A, it still offers reliable performance and meets industry standards. The initial investment required for System B is considerably lower compared to System A. However, Chris estimates that the cash inflows generated by System B would be relatively lower than those of System A.

To analyze these alternatives, Chris, a financial analyst, prepared estimates of the initial investment and cash inflowsassociated with each system. Theseareshown in thefollowing table.

	System A	System B
Initial investment	($660,000)	($360,000)
Year	Cash inflows
1	$128,000	$88,000
2	$182,000	$120,000

3	$166,000	($56,000)
4	$168,000	$186,000
5	$400,000	$257,000
IRR	14.6182%	15.4368%

The useful lives of both systems are 5 years. At the end of that time, the adopted system will be sold, thus accounting for the large fifth-year cash inflows. Chris believes that the two systems are equally risky and that the acceptance of either of them will not change the firm’s overall risk. Therefore, the company’s cost of capital is appropriate for the required rate of return for this investment. Jupiter Inc. requires all projects to have a maximum payback period of 4 years.

The company'scurrentcapitalstructure is reflectedinthefollowing extract fromthelatest balance sheet:

Long-termdebt Bookvalue ($)

Bonds: Par $1000, annual coupon 8%, 7 years to maturity 8,500,000 Equity

Ordinary shares (6,000,000sharesissued) 6,000,000

Total 14,500,000

The company's bonds are now trading at par value, and the current market price of the company's ordinary shares is $2.44.

The company has recently paid and ordinary dividend of $0.22 per share. Chris expects ordinary dividends to growat4%nextyearandintotheforeseeable future. The applicable tax rate is 25%.

Determine the weighted average cost of capital of the company. (5marks)

Chris notices that the IRR of System B is above the required rate of return and it is also higher than that of System A. Moreover, the initial investment for System B is also smaller than that of System A. Therefore, she decides that System B should be adopted. If you are the CFO of Juniper Inc., do you support her decision? (6 marks)

Should Chris use the WACC in part a as the required return for the projects? Explain your answer in detail and state all assumptions clearly. (6 marks)

Which project should be accepted? Please explain your decision in detail by using all the appropriate methods of making capital budgeting decision. (8 marks)

Assess the scalability, flexibility, and risk management considerations associated with implementing System A and System B for Jupiter Inc.'s new production system. How do these factors impact the strategic options for choosing each system? (15marks)