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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Task xx xxxxxxx Budgeting xxx a xxx xxxxxxxxx• What is the xxxxxxx’x IRR? xxx xxxxxxx
xxx is that rate xx discount where xxxxx
xxxxx Excel formula, IRR xxx found xx xx xxxxxxx xx and 23%and then xxxxxxxx xxxxxxxxxx as follows:
LDR xxxxxxxx xxxxxxxxxxx xxxxxxxxxxxxxxxxxx x xxxxx xxxxxxxx xxxxxxxxx xxxxxx xxxxxxxx Rate Pv1= xxxxxxx xxxxx xx xxxxx Rate Of xxxxxxxxxxx Present Value xx Higher xxxx Of xxxxxxxx = xxx Cash Outlay
xxxxxxxxxxxxxxxxxxxxxxxxxx 
 PVF @ 22%  xx CASH FLOW  PVF 23%  PV xxxx xxxx 
x  ($3,000,000.00) 
 ($3,000,000.00) 
 ($3,000,000.00) 
x  $1,100,000  0.820  $901,639.34  0.813  $894,308.94 
x  xxxxxxxxxx  0.672  xxxxxxxxxxx  0.661  $958,424.22 
x  $1,300,000  0.551  xxxxxxxxxxx  xxxxx  $698,599.09 
4  $950,000  xxxxx  xxxxxxxxxxx  0.437  $415,052.62 


 xxxxxxxxxx 
 ($33,615.12) 
xxx (20587.92)/ xxxxxxxxxx *1= xxxxxx
• xxxx xx xxx project’x xxxx xxx pts)
xxxxxxxxxxxxxxYEAR 
 xx xxxx xxxx  
0  xxxxxxxxxxxxxxx  x  ($3,000,000.00) 
x  $1,100,000  xxxxx  $956,521.74 
2  $1,450,000  0.756  xxxxxxxxxxxxx 
x  xxxxxxxxxx  0.658  $854,771.10 
4  $950,000  0.572  xxxxxxxxxxx 


 $450,866.74 
NPV= $450,866.74. • Should the xxxxxxx xxxxxx this project xxx xxx (or xxx xxxxx xx xxxx xxx
The xxxxxxx xxxxxx accept xxx xxxxxxx xx NPV is positive at the desired rate of return and IRR is 22.38%.
• xxxxxxx xxx depreciation xxxx xxxxxx xxx present value xx xxx project. xxx xxxx xxx
Depreciation is a xxxxxxxx item, xx will xx xxxxx xxxx xx
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Task 4. xxxxxxx Budgeting for x New Machine • What is xxx project’x IRR? xxx xxxxxxx
IRR xx that xxxx of xxxxxxxx where xxxxx
xxxxx xxxxx formula, IRR xxx xxxxx to xx xxxxxxx xx and 23%and xxxx xxxxxxxx xxxxxxxxxx as xxxxxxxx
xxx +[PV1Q] xxxxxxxxxxx xxxxxxxxxxxxxxxxxx = Lower xxxxxxxx Rate Hdr= Higher Discount Rate Pv1= xxxxxxx Value At xxxxx Rate xx Return Pv2= xxxxxxx xxxxx At xxxxxx xxxx Of xxxxxxxx = Net xxxx xxxxxx
xxxxxxxxxxxxxxxxxxxxxYEAR 
 xxx @ 22%  xx CASH FLOW  xxx 23%  xx CASH xxxx 
0  xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
x  $1,100,000  xxxxx  $901,639.34  0.813  $894,308.94 
x  $1,450,000  xxxxx  $974,200.48  0.661  xxxxxxxxxxx 
3  xxxxxxxxxx  0.551  xxxxxxxxxxx  xxxxx  $698,599.09 
x  $950,000  0.451  xxxxxxxxxxx  xxxxx  $415,052.62 


 $20,587.92 
 xxxxxxxxxxxx 
22+ (20587.92)/ xxxxxxxxxx xxx xxxxxx
• What xx xxx project’s NPV? xxx pts) xxx
xxxxxxxxxxxxxxxxx 
 PV xxxx xxxx  
x  xxxxxxxxxxxxxxx  1  ($3,000,000.00) 
x  $1,100,000  0.870  $956,521.74 
2  $1,450,000  0.756  xxxxxxxxxxxxx 
3  xxxxxxxxxx  0.658  $854,771.10 
x  $950,000  xxxxx  xxxxxxxxxxx 


 $450,866.74 
NPV= xxxxxxxxxxxxx• xxxxxx the company xxxxxx xxxx project xxx xxx xxx why not)? (5 pts)
xxx xxxxxxx should accept xxx project as xxx xx xxxxxxxx at xxx desired rate of xxxxxx xxx xxx is 22.38%.
• xxxxxxx how xxxxxxxxxxxx will xxxxxx the xxxxxxx value xx xxx project. (10 xxxx
xxxxxxxxxxxx xx x xxxxxxxx xxxxx it xxxx xx xxxxx xxxx xx
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Task xx xxxxxxx xxxxxxxxx xxx x xxx xxxxxxxxx• xxxx is xxx xxxxxxx’x xxxx (10 pts)
IRR xx that xxxx of discount where NPV=0
xxxxx xxxxx xxxxxxxx IRR xxx xxxxx to xx between xx and 23%and xxxx xxxxxxxx calculated as xxxxxxxx
LDR +[PV1Q] /[PV1PV2]* (HDRLDR) Here Ldr = xxxxx Discount Rate Hdr= Higher xxxxxxxx Rate Pv1= xxxxxxx Value xx Lower xxxx Of xxxxxxxxxxx Present Value xx xxxxxx xxxx xx xxxxxxxx x Net xxxx Outlay
xxxxxxxxxxxxxxxxxxxxxxx 
 PVF @ 22%  xx CASH FLOW  xxx xxx  PV CASH xxxx 
x  ($3,000,000.00) 
 xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
1  $1,100,000  xxxxx  $901,639.34  0.813  xxxxxxxxxxx 
x  $1,450,000  xxxxx  xxxxxxxxxxx  xxxxx  xxxxxxxxxxx 
x  xxxxxxxxxx  xxxxx  xxxxxxxxxxx  xxxxx  $698,599.09 
x  $950,000  xxxxx  xxxxxxxxxxx  0.437  $415,052.62 


 xxxxxxxxxx 
 xxxxxxxxxxxx 
xxx xxxxxxxxxxx $54,203.04 *1= xxxxxx
• xxxx is xxx project’s NPV? (15 xxxx xxx
xxxxxxxxxxx 
 xx xxxx FLOW  
0  xxxxxxxxxxxxxxx  1  xxxxxxxxxxxxxxx 
1  $1,100,000  xxxxx  xxxxxxxxxxx 
x  xxxxxxxxxx  xxxxx  xxxxxxxxxxxxx 
x  $1,300,000  0.658  $854,771.10 
4  $950,000  0.572  $543,165.58 


 $450,866.74 
xxxx $450,866.74. • xxxxxx xxx company xxxxxx this xxxxxxx xxx xxx xxx why not)? xx pts)
The xxxxxxx xxxxxx xxxxxx xxx project as NPV is xxxxxxxx at xxx desired xxxx of return xxx IRR xx xxxxxxx
• xxxxxxx how xxxxxxxxxxxx will affect the present value of xxx project. (10 xxxx
xxxxxxxxxxxx is a xxxxxxxx xxxxx it xxxx xx added xxxx xx
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task 5
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xxxx 5
Task xx Cost of xxxxxxxxxxxxxxx the xxxx xx xxxxx Assume AirJet xxxx Parts Inc. is xxxxxxxxxxx xxxxxxx new bonds. Select current bonds xxxx xxx xx xxx main xxxxxxxxxxx xx x benchmark. xxx xxxxxxxxxxx include Raytheon, Boeing, xxxxxxxx xxxxxxx and the xxxxxxxx Grumman Corporation.
• xxxx is xxx xxx xx the xxxxxxxxxx’x bond? xxx xxx use x xxxxxx of xxxxxxxx xxx we recommend Morningstar. xxxx xxx YTM of one 15 xx 20 xxxx xxxx with xxx xxxxxxx possible creditworthiness. You may assume that xxx bonds issued xx AirJet xxxx Parts, xxxx xxx of similar xxxx xxx xxxx require the xxxx xxxxxxx xx pts) xxx
Source: Morning star.
xx xx 20 years xxxx 2013 xxxx be 2028 xx 2033. So xx select xxxxxx 6.125% xxxx xxxx xxxxxx in xxxxx YTM xxx this xxxx is 4.64%
• What is xxx aftertax cost of debt xx the xxx rate is 34%? xx pts) xxx
xxxxxxYTM  xxxxx  
xxx rate  xxxx  
4.64 *(10.34)*100  
xxxxx xxx xxxx xx debt  xxxxxx 
• Explain what other methods you could xxxx xxxx xx find xxx
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answer for task 4
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xxxx xx Capital Budgeting xxx a xxx xxxxxxxxx• xxxx xx the project’s xxxx (10 xxxxxxx
xxx xx that xxxx xx xxxxxxxx xxxxx NPV=0
Using Excel xxxxxxxx IRR was found xx be xxxxxxx 22 and 23%and then manually xxxxxxxxxx as xxxxxxxx
LDR xxxxxxxx /[PV1PV2]* (HDRLDR) Here Ldr x Lower xxxxxxxx xxxxxxxxx xxxxxx xxxxxxxx xxxxxxxxx Present xxxxx xx Lower xxxx Of Return Pv2= Present Value At Higher xxxx Of Return Q = xxx Cash xxxxxx
xxxxxxxxxxxxxxxxxxxxxYEAR 
 xxx @ 22%  PV CASH FLOW  xxx xxx  PV xxxx xxxx 
0  xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
 xxxxxxxxxxxxxxx 
x  $1,100,000  0.820  $901,639.34  0.813  $894,308.94 
x  xxxxxxxxxx  0.672  $974,200.48  xxxxx  xxxxxxxxxxx 
x  $1,300,000  xxxxx  xxxxxxxxxxx  0.537  $698,599.09 
x  $950,000  0.451  $428,829.13  xxxxx  $415,052.62 


 xxxxxxxxxx 
 ($33,615.12) 
22+ (20587.92)/ xxxxxxxxxx xxx 22.38%
• xxxx xx xxx project’x NPV? xxx xxxx
xxxxxxxxxxxx 
 xx CASH xxxx  
0  xxxxxxxxxxxxxxx  x  ($3,000,000.00) 
x  xxxxxxxxxx  xxxxx  $956,521.74 
2  xxxxxxxxxx  xxxxx  $1,096,408.32 
x  xxxxxxxxxx  0.658  xxxxxxxxxxx 
x  xxxxxxxx  xxxxx  xxxxxxxxxxx 


 $450,866.74 
xxxx xxxxxxxxxxxxx• xxxxxx the xxxxxxx xxxxxx xxxx xxxxxxx xxx xxx xxx why not)? (5 xxxx
The company should accept xxx xxxxxxx xx xxx is positive xx xxx xxxxxxx rate of xxxxxx and xxx is xxxxxxx
• Explain xxx depreciation xxxx xxxxxx the xxxxxxx xxxxx of the project. xxx xxxx
xxxxxxxxxxxx xx a xxxxxxxx item, xx xxxx be added xxxx xx
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