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The director of finance has discovered an error in his WACC calculation. He did not factor in the tax rate when determining the cost of debt. UPC has a line of credit at 4%

 

 

 

interest, and the company is taxed at 30%. Further, assume that UPC’s required rate of return on equity is 14%, and its capital structure is 40% debt and 60% equity.

 

 

 

Additionally, the budget committee question and answer session revealed that UPC has discovered a technology that will increase its product life span by 1 year. The new

 

 

 

technology will add $120,000 and $130,000 to projects A and B’s initial capital outlay, respectively. Further, the finance department has determined that cash flows for years

 

 

 

1, 2, and 3 will be unchanged. However, net cash flows for year 4 will be $300,000 and $150,000 for projects A and B, respectively.

 

Using the attached Excel file, the UPC scenario, and the new information above, calculate the NPV, IRR, MIRR, and payback periods from projects A and B. You

 

must input all of your data into an Excel spreadsheet and show all formulas.

 

Using MS Word, explain any risk factors inherent in the budgeting for the 2 projects.

 

 

 

  • 9 years ago
  • 20
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  • attachment
    excell.xlsx
  • attachment
    inherent_risk_on_the_two_projects.docx