Felicia & Freds executive board has asked you to change the decision model previ
ID: 2634831 • Letter: F
Question
Felicia & Freds executive board has asked you to change the decision model previously completed to reflect the following changes regarding increased leverage, WACC, and cash flows. It is your job to calculate the decision rules for NPV and IRR given the information provided.
Requirements: Part 1 is done! I need help with part 2 and 3 only.
1. Determine the new target weighted average cost of capital for Felicia & Fred, given following assumptions:
Use the CAPM for calculation of the cost of equity.
2. Calculate the cash flows for the new crystal jewelry project given the following assumptions:
Compute net present value and internal rate of return of the project.
3. Although crystal jewelry is extremely popular at the moment, Felicia & Fred are concerned about the product life cycle and would like to explore an abandonment option. Management asks for an additional scenario to be developed, reflecting a three- rather than a five-year life cycle for this project, including cash flows and asset life. Compute the net present value and internal rate of return given this change in parameter.
You may use Excel to complete this project. Attached is an Excel template to assist with working through this problem. Short application 2 problem template_Corrected_.xlsx
Additionally, provide a 250500 word executive summary on the results of the decision rule given these two scenarios with a five- and three-year project life, and revised WACC. Advise Felicia & Fred specifically regarding the abandonment option versus the initial five year project.
Explanation / Answer
Cost of Equity=RF+Beta*Risk Premium=2+1.3*(12-2) 15 Cost of bond=9*(1-Tax)=9*(1-0.35) 5.85 WACC=0.30*15+0.70*5.85 8.595 Particulars/Year 0 1 2 3 4 5 Initial Investment(A) 25 Profit =0.40*25-Admn and Selling expenses=0.40*25-0.05*25(B) 8.75 8.75 8.75 8.75 8.75 Deprociation=25/5
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