Based on the inputs below prepare a capital budget analysis for this Base Case using the Net Present Value, Internal Rate of Return, Profitability Index and Payback in years methods, determining whether the project is feasible. The Weighted Average Cost of Capital also needs to be determined to complete the analysis.

Spreadsheet template is provided, you need to fill in and complete the calculations.

Project Inputs:

Cost of Capital:

U.S. Treasury 10-year yield = 4.31%

S&P 500 Return = 12.5%

Capital Structure = Liabilities (55%), Equity (45%)

Firms Cost of Debt = Prime Interest Rate plus 3%

Companys Beta = 1.40

Project Investment Outlay, Year 0 - $750,000

Project Investment Life 5 years

Project Depreciation - $150,000 / year

Project Salvage Value - $25,000

Working Capital Base of Annual Sales 10%

Project Tax Rate 22%

Inflation Rate for Selling Price/unit, Variable Cost/unit, and Fixed Costs = 4.0% after Year 1

Units sold per year 40,000

Selling Price per Unit, Year 1 - $40.00

Fixed operating costs per year excluding depreciation - $175,000

Manufacturing (Variable) costs per unit, Year 1 - $30.00

The issues to address in your analysis are the following:

1) Please explain the cost of capital as a variable in your analysis?

2) Would you recommend this project and why? If you do not recommend, why not?

What were the key factors in your recommendation?

3) Going forward, what adjustments would you recommend to make this project produce greater return?