Requirements: Submit an Excel spreadsheet with 4 tabs, one for each: Cost of Capital calculations, Project A, Project B, and Project C. A specific notation is to be made on the project which the student believes the company should pursue and why. Please attach an Excel file with the solutions worked out for cost of capital calculations, Project A, Project B, and Project C. work out ALL solutions for this final!

MBA 643 FINANCIAL MANAGEMENT FINAL PROJECT Applied Manufacturing, Inc. (AM) is a custom metal fabrication corporation providing a wide range of goods and services to its customers. For decades, AM has been a parts manufacturer and supplier to the aerospace and naval industries. They service both major manufacturers such as Nordam, Boeing, and Airbus, as well as the United States Government in contracts for both military aircraft and naval vessels. While the existing lines of business are profitable, senior leadership of the corporation is pushing for the creation of new lines of business that will generate new revenue streams that are not dependent on their existing clients. As part of its budgeting process for the next year, the senior leadership team has identified three mutually-exclusive projects which meet the strategic goals mentioned above. As a member of the senior leadership team, you have been assigned the task of performing a financial analysis of these projects to determine the appropriate valuation of each one. However, before you can determine the appropriate valuations of these projects, you need to determine the weighted average cost of capital for the firm. Senior management has a preference in using the market values of the firm's capital structure and believes its current structure is optimal. BALANCE SHEET Cash 1,789,298 Accounts Payable and Accruals 28,204,824 Accounts Receivable 52,740,911 Notes Payable 48,240,305 Inventories 70,670,223 Long-Term Debt 77,260,000 Preferred Stock 15,000,000 Net Fixed Assets 179,040,000 Common Equity 135,535,303 Total Assets 304,240,432 Total Liabilities & Equity 304,240,432 Market Values of Capital The company has 81,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $899.24. The company also has 150,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a 3.6% per share flotation cost. The company has 5 million shares of common stock outstanding with a current price of $29.84 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with flotation costs of 6.7% per share. The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 13 percent. Your stock's beta is 1.18.

Your firm does not use notes payable for long-term financing. Your firm's federal + state marginal tax rate is 28%. For all projects, the reinvestment rate shall be 9.5% Project A: This project requires an initial investment of $20,000,000 in equipment which will cost an additional $3,000,000 to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase raw goods inventory by $5,000,000, but it will also see an increase in accounts payable of $1,500,000. With this investment, the project will last 6 years at which time the market value for the equipment will be $1,000,000. The project will produce a product with a sales price of $20.00 per unit and the variable cost per unit will be $10.00. It is estimated the sales volume for this project will be 700,000 in year 1, 1,000,000 in year 2, 650,000 in year 3, 700,000 in year 4, 650,000 in year 5 and 550,000 in year 6. The fixed costs would be $2,000,000 per year. Because this project could use some existing company infrastructure, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of 2 percentage point below its current WACC as the valuation hurdle it must meet or surpass. Project B: This project requires an initial investment of $20,000,000 in equipment which will require additional expense of $1,000,000 to install in the current facility. Consistent with other projects, the equipment will be depreciated using the MACRS Investment Class schedule. Once installed, the firm will need to increase inventory by $6,000,000. The project will last 6 years, but at the end of that period, the equipment will have no salvage value. During the operational period of this project, the product produced will sell for $6.50 per unit. The costs related to this product will be $4.00 per unit in variable cost and the fixed costs each year will be $1,000,000. Management has estimated that the sales volume for this project will be 3,500,000 in year 1, 4,000,000 in year 2, 4,250,000 in year 3, 4,500,000 in year 4, 4,300,000 in year 5, and 4,200,000 in year 6. Since this project has been brought under consideration through the normal channels, a discount rate equal to the WACC should be used in the project valuation. Project C: This project is significantly outside of the normal products sold of the firm. The project is a reconsideration of a project proposed two years ago by a former manager. At that time a marketing study costing $200,000 was done; however, the project was not undertaken. Now the firm needs to consider if this project is worth the firm's capital investment dollars. This project would require investment in equipment of $20,000,000 with an additional cost of $5,000,000 in installation fees. The project will be depreciated using the MACRS schedule. At the end of the project, management estimates that the

equipment could be sold at a market value of $5,000,000. This project also creates a need to increase raw goods inventory by $6,000,000. During the operational cycle of this project, the product would have a sales price of $90.00 per unit. Costs associated with this project would be $65.00 in variable cost per unit and a fixed cost per year of $5,000,000. Management estimates that the sales volume would be 500,000 units in year 1, 600,000 units in year 2, 700,000 units in year 3, 800,000 units in year 4, 800,000 units in year 5, and 600,000 units in year 6. Because management is uneasy with undertaking a project so far outside of its normal product portfolio, it is imposing a 3-percentage-point premium above the WACC as the required rate of return on the project. Modified Accelerated Cost Recovery System (MACRS) Ownership Year 5-Year Investment Class Depreciation Schedule 1 20% 2 32% 3 19% 4 12% 5 11% 6 6% Total = 100% Requirements 1. Calculate the costs of the individual capital components: a. Before-tax cost of long-term debt b. After-tax cost of long-term debt c. Cost of preferred stock d. Average cost of retained earnings (average of both values below) i. Capital Asset Pricing Model method ii. Dividend Discount Model method 2. Determine the target percentages for the optimal capital structure, and then compute the WACC. (Carry weights to four decimal places. For example: 0.2973 or 29.73%) 3. Create a valuation spreadsheet for each of the projects mentioned above. Evaluate each project according to the following valuation methods: a. Net Present Value of Discounted Cash Flow b. Internal Rate of Return c. Modified Internal Rate of Return d. Payback Period

4. Recommendations: Provide a written synopsis evaluation of each project and provide your recommendation of which of the projects management should accept for its capital expenditures budget for the upcoming year. NOTE: Your deliverables are an Excel spreadsheet showing your calculations and a Word document containing your qualitative explanations.