Can you assist me with finance?
ntroduction
You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4) and (2) the firm’s cost of capital (Task 5).
Task 4. Capital Budgeting for a New Machine
A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows:
Year 1 $1,100,000
Year 2 $1,450,000
Year 3 $1,300,000
Year 4 $950,000
You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.
• What is the project’s IRR? (10 pts)
• What is the project’s NPV? (15 pts)
• Should the company accept this project and why (or why not)? (5 pts)
• Explain how depreciation will affect the present value of the project. (10 pts)
• Provide examples of at least one of the following as it relates to the project: (5 pts each)
• Sunk Cost
• Opportunity cost
• Erosion
• Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some projectspecific risks and market risks related to this project? (20 pts)
Task 5: Cost of Capital
AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like to determine it. You will assist in the process of obtaining this rate.
• Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation.
• What is the YTM of the competitor’s bond? You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5 pts)
• What is the aftertax cost of debt if the tax rate is 34%? (5 pts)
• Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.(10 pts)
• Explain why you should use the YTM and not the coupon rate as the required return for debt. (5 pts)
• Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%.
• What is the cost of common equity? (5 pts)
• Explain the advantages and disadvantages to use the CAPM model as the method to compute the cost of common equity. Compare and contrast this method with the dividend growth model approach. (10 pts)
• Compute the cost of preferred equity assuming the dividend paid for preferred stock is $2.93 and the current value of the stock is $50 per share.
• What is the cost of preferred equity? (5 pts)
• Is there any other method to compute this cost? Explain. (5 pts)
• Assuming that the market value weights of these capital sources are 30% bonds, 60% common equity and 10% preferred equity, what is the weighted cost of capital of the firm? (10 pts)
• Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts)
• Recompute the net present value of the project based on the cost of capital you found. Do you still believe that your earlier recommendation for accepting or rejecting the project was adequate? Why or why not? (5 pts)
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xxxx xx Capital Budgeting for x New Machine • What is xxx project’s xxxx (10 pts)
xxx is xxxx xxxx xx xxxxxxxx where xxxxx
xxxxx xxxxx formula, xxx was found to xx xxxxxxx 22 xxx 23%and then manually calculated as follows:
LDR xxxxxxxx /[PV1PV2]* xxxxxxxxxxxxxxxxxx x xxxxx xxxxxxxx xxxxxxxxx Higher xxxxxxxx xxxxxxxxx Present xxxxx At xxxxx Rate xx xxxxxxxxxxx Present xxxxx xx Higher xxxx Of xxxxxxxx x Net xxxx Outlay
xxxxxxxxxxxxxxxxxxxYEAR 
 xxx @ 22%  PV CASH xxxx  xxx xxx  xx xxxx xxxx 
0  xxxxxxxxxxxxxxx 
 ($3,000,000.00) 
 ($3,000,000.00) 
1  xxxxxxxxxx  xxxxx  $901,639.34  0.813  $894,308.94 
2  xxxxxxxxxx  0.672  $974,200.48  xxxxx  $958,424.22 
3  xxxxxxxxxx  0.551  $715,918.95  xxxxx  xxxxxxxxxxx 
x  xxxxxxxx  xxxxx  $428,829.13  xxxxx  $415,052.62 


 xxxxxxxxxx 
 ($33,615.12) 
xxx xxxxxxxxxxx $54,203.04 xxx xxxxxx
• What is the xxxxxxx’x xxxx (15 xxxx xxx
xxxxxxxxx 
 xx xxxx xxxx  
x  ($3,000,000.00)  x  xxxxxxxxxxxxxxx 
x  $1,100,000  xxxxx 
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xxxx xx xxxxxxx xxxxxxxxx xxx a New Machine • xxxx xx the xxxxxxx’x xxxx xxx pts)
IRR xx xxxx xxxx xx discount where xxxxx
Using Excel xxxxxxxx xxx was found xx xx xxxxxxx xx and xxxxxx xxxx xxxxxxxx xxxxxxxxxx xx follows:
LDR +[PV1Q] xxxxxxxxxxx xxxxxxxxxxxxxxxxxx = xxxxx xxxxxxxx xxxxxxxxx xxxxxx Discount xxxxxxxxx xxxxxxx xxxxx At Lower Rate Of xxxxxxxxxxx Present xxxxx xx Higher xxxx Of Return Q = Net xxxx Outlay
xxxxxxxxxxxxxxxxxYEAR 
 PVF x xxx  xx xxxx xxxx  PVF xxx  xx CASH FLOW 
x  xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
x  xxxxxxxxxx  0.820  $901,639.34  xxxxx  $894,308.94 
2  xxxxxxxxxx  0.672  $974,200.48  xxxxx  xxxxxxxxxxx 
x  $1,300,000  0.551  xxxxxxxxxxx  0.537  $698,599.09 
x  xxxxxxxx  0.451  xxxxxxxxxxx  0.437  xxxxxxxxxxx 


 $20,587.92 
 xxxxxxxxxxxx 
xxx (20587.92)/ xxxxxxxxxx *1= 22.38%
• xxxx is xxx xxxxxxx’s xxxx (15 pts) xxx
xxxxxxxxYEAR 
 xx CASH xxxx  
x  xxxxxxxxxxxxxxx  x  xxxxxxxxxxxxxxx 
x  xxxxxxxxxx  0.870 
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Task 4. xxxxxxx Budgeting xxx x New Machine • What xx the xxxxxxx’s xxxx xxx xxxxxxx
xxx is xxxx rate of discount where xxxxx
Using Excel xxxxxxxx xxx was xxxxx to xx between xx xxx xxxxxx xxxx xxxxxxxx xxxxxxxxxx xx follows:
LDR +[PV1Q] xxxxxxxxxxx xxxxxxxxxxxxxxxxxx = Lower xxxxxxxx xxxxxxxxx xxxxxx Discount xxxxxxxxx xxxxxxx Value At Lower xxxx Of xxxxxxxxxxx xxxxxxx xxxxx xx Higher Rate xx Return Q x Net xxxx xxxxxx
xxxxxxxxxxxxxxxxxxxxxxYEAR 
 xxx x xxx  xx CASH xxxx  xxx xxx  PV xxxx xxxx 
x  ($3,000,000.00) 
 ($3,000,000.00) 
 ($3,000,000.00) 
x  xxxxxxxxxx  xxxxx  $901,639.34  xxxxx  xxxxxxxxxxx 
x  $1,450,000  0.672  xxxxxxxxxxx  0.661  $958,424.22 
x  xxxxxxxxxx  0.551  $715,918.95  xxxxx  $698,599.09 
x  xxxxxxxx  0.451  xxxxxxxxxxx  0.437  xxxxxxxxxxx 


 $20,587.92 
 xxxxxxxxxxxx 
22+ (20587.92)/ $54,203.04 xxx 22.38%
• What xx the xxxxxxx’x NPV? xxx xxxx
xxxxxxx 
 xx CASH xxxx  
x  xxxxxxxxxxxxxxx  x  ($3,000,000.00) 
x  xxxxxxxxxx  xxxxx 
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task 5
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xxxx x
xxxx 5: Cost of xxxxxxxxxxxxxxx the cost of xxxxx xxxxxx AirJet Best xxxxx Inc. xx xxxxxxxxxxx xxxxxxx xxx xxxxxx Select xxxxxxx bonds xxxx one xx xxx main xxxxxxxxxxx as a xxxxxxxxxx xxx xxxxxxxxxxx xxxxxxx xxxxxxxxx Boeing, Lockheed Martin, xxx xxx xxxxxxxx Grumman xxxxxxxxxxxx
• xxxx is the YTM of xxx competitor’x bond? You xxx xxx a number of sources, but xx recommend xxxxxxxxxxxx xxxx xxx YTM xx xxx 15 or xx year bond xxxx xxx xxxxxxx possible xxxxxxxxxxxxxxxxx xxx xxx assume xxxx xxx bonds issued xx AirJet Best Parts, xxxx xxx of xxxxxxx risk xxx xxxx xxxxxxx the same xxxxxxx xx pts) xxx
Source: Morning xxxxx
xx to 20 xxxxx xxxx xxxx will xx xxxx to 2033. So xx select xxxxxx 6.125% that xxxx xxxxxx xx 2033. xxx for xxxx bond is xxxxx
• What is xxx xxxxxxxxx cost xx debt xx xxx xxx xxxx is 34%? (5 pts) xxx
xxxxxxxxx  xxxxx  
Tax xxxx  xxxx  
4.64 *(10.34)*100  
xxxxx tax xxxx xx debt  3.0624 
• xxxxxxx xxxx xxxxx methods you could have used xx find xxx
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answer for task 4
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xxxx xx Capital xxxxxxxxx for x New Machine • What is the project’s IRR? xxx xxxxxxx
xxx is that rate xx xxxxxxxx where NPV=0
Using Excel xxxxxxxx xxx was xxxxx to be xxxxxxx xx xxx xxxxxx then manually xxxxxxxxxx xx follows:
LDR +[PV1Q] /[PV1PV2]* xxxxxxxxxxxxxxxxxx x xxxxx Discount xxxxxxxxx Higher xxxxxxxx xxxxxxxxx xxxxxxx Value At Lower Rate xx xxxxxxxxxxx xxxxxxx xxxxx At xxxxxx Rate xx Return Q = xxx Cash Outlay
xxxxxxxxxxxxxxxxxxxxxxxxxx 
 xxx x 22%  PV CASH FLOW  PVF 23%  PV CASH xxxx 
0  xxxxxxxxxxxxxxx 
 ($3,000,000.00) 
 xxxxxxxxxxxxxxx 
x  $1,100,000  xxxxx  $901,639.34  xxxxx  $894,308.94 
2  $1,450,000  xxxxx  xxxxxxxxxxx  0.661  $958,424.22 
3  xxxxxxxxxx  0.551  xxxxxxxxxxx  xxxxx  xxxxxxxxxxx 
4  xxxxxxxx  0.451  xxxxxxxxxxx  0.437  xxxxxxxxxxx 


 xxxxxxxxxx 
 xxxxxxxxxxxx 
xxx (20587.92)/ xxxxxxxxxx *1= 22.38%
• xxxx xx the xxxxxxx’x xxxx xxx pts)
xxxxxxxxxxx 
 xx CASH xxxx  
0  xxxxxxxxxxxxxxx  1  xxxxxxxxxxxxxxx 
x  xxxxxxxxxx  0.870 
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assignment as discussed with youNEEL
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xxxxxxxx xxxx xxxxxx xxxx you xxxxx work xx x financial xxxxxxx for AirJet Best Parts, xxxx The company xx considering x xxxxxxx investment xx a xxx machine xxx you xxx xx xxxxxx xx xxxxxx x xxxxxxxxxxxxxx on xxx xxxxxxxx xxxxx xx (1) a xxxxx xxxx xx xxxxxx xx xxx (Task xx and xxx the firm’s xxxx of xxxxxxx (Task 5). 
Task xx xxxxxxx xxxxxxxxx xxx x New Machine 
A xxx months have xxx xxxxxx xxx AirJet Best xxxxxx Inc. xx xxxxxxxxxxx xxx xxxxxxxx on x xxx machine xxxx xxxx xxxxxxxx the production of x special component significantly. The anticipated xxxx flows xxx xxx xxxxxxx are as xxxxxxxx 
Year 1 $1,100,000 
Year 2 $1,450,000 
xxxx 3 xxxxxxxxxx 
Year x xxxxxxxx 
xxx xxxx now been tasked with xxxxxxxxx a recommendation xxx xxx xxxxxxx based xx the results of x Net Present    more text follows    
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