Calculation & Recommendation
I would recommend that Fine Food Catering undertake the expansion. The net present value of the project is -$86,477. As a rule of thumb, firms should never undertake projects that have a negative net present value. The net present value derives from the following calculations.
The initial investment is $260,000, which is in today’s dollars. Future cash flows are discounted by the hurdle rate, 14%, which represents the amount needed to account for the risk of the project. These future cash flows were calculated on the basis of several assumptions. Operating 250 days per year, with 75% of the 200 turned-away customers estimated to come into the expanded facility, this gives us 37,500 extra customers per year. The average ticket is $5.40, giving us a contribution of $3.24. Multiplied by the expected number of new customers, this gives us $121,500 in expected annual contribution flows attributable to the expansion.
There are several expenses incurred as a result of the expansion. The new hires we will need to make cost $62,000 per year. Additional cleaning expenses, based on 250 days per year, will be $11,250. Additional inventory requirements will cost $20,250 per year. This gives us an EBITDA of $28,000. The depreciation expense, at a CCA of 15%, gives us a tax shelter for 6 2/3 years. This tax shelter means that we do not pay tax on the additional income until the seventh year, with the depreciation tax shelter having disappeared completely by year 8. The salvage value contributes profit in year 20.
The impact of the discount, rate, however, negates much of the impact of the salvage value. By the time the depreciation tax shelter has lapsed in year 8, the present value of the cash flows is less than $8,000. Thus, the cash flows over the 20-year period do not make a large enough contribution to cover the initial $260,000 outlay.
b. If the discount rate used was 12.5% instead of 14%, this would not make a difference to the recommendation. I would still recommend that FFC not undertake the expansion. The NPV of the project would be at 12.5% a value of -$71,105. Intuitively, we know that the time value of money means that a small change in the discount rate is not going to have a significant impact beyond the first few years. In those first few years, cash flows are not large, even with the depreciation tax shelter. The company would need to make more money in the short run with respect to this project, in order to justify it.
Q2. a. The cost of capital can be calculated by calculating the cost of the different constituents of capital. To calculate the cost of debt, we must estimate what the new bonds will cost. Using a bond calculator, we know that their current bonds are yielding 6.76%. Once adjusted for annual interest to accommodate the bond calculator, the Magna bonds are trading at a yield of 8.60%. This means the yield needed for our new bonds is 8.90% over 25 years. Given the issue price of 102.00, this will require a coupon of 10.3%. Add to this the 2.2% cost. This brokerage fee is tax-deductible, so the after tax cost of the brokerage fee is 1.76%. Thus, the total cost of debt for Byfield is 10.3+1.76 = 12.06%.
The current yield on Byfield preferred stock is 8.95%. Add to this the cost of issuing the stock, which is 2.7%, or 2.16% after tax, and the cost of preferred equity is 11.11%. We can use the dividend discount model to calculate the cost of equity, which will be 19.1%. Add to this the after-tax brokerage costs 3.864% to get a cost of equity of 22.964%. From there, the weighted average cost of capital is going to be (.38)(.1206)+(.14)(11.11)+(.48)(.2296) = 17.15%.
Based on this average cost of capital, the only project that Byfield should undertake will be the thermal transfer colour printer. This project has an expected return of 18.8%, which is greater than the cost of capital (hurdle rate). The other two projects will return less than they cost.
b. In the phrase “cost of capital,” the debt, preferred stock and equity all have a cost. To raise money via each of these requires making payment to the party providing the money. In the case of equity, this is future cash flows and those are not guaranteed, which is why the cost of equity is highest (it is riskier). But Byfield must provide a return to the provider of the capital that is commensurate with the company’s risk.
Knowing the cost of capital is critical for a company. Because raising capital has costs – returns given and brokerage fees – associated with it, any investment the firm makes must exceed the cost of capital. Any project undertaken that does not yield in excess of the cost of capital is, in effect, costing the company money. The thermal printer is a viable project because it will earn Byfield more than it costs (assuming Byfield leaves its capital structure intact). The other projects will also earn Byfield money, but they will not earn Byfield enough money to pay for the cost of the money Byfield spent to undertake the project. Thus, the cost of capital becomes the basis for all capital decisions, because it represents the market’s view of the firm’s inherent risk. Cost of capital is also a good starting point for the evaluation of projects that bear more risk or less than the firm’s typical operations.
The hurdle rate for such projects can be adjusted using the normal cost of capital as a starting point.
Bond Calculator: http://www.smartmoney.com/investing/bonds/bond-calculator-7917
Get Professional Assignment Help Cheaply
Are you busy and do not have time to handle your assignment? Are you scared that your paper will not make the grade? Do you have responsibilities that may hinder you from turning in your assignment on time? Are you tired and can barely handle your assignment? Are your grades inconsistent?
Whichever your reason is, it is valid! You can get professional academic help from our service at affordable rates. We have a team of professional academic writers who can handle all your assignments.
Why Choose Our Academic Writing Service?
- Plagiarism free papers
- Timely delivery
- Any deadline
- Skilled, Experienced Native English Writers
- Subject-relevant academic writer
- Adherence to paper instructions
- Ability to tackle bulk assignments
- Reasonable prices
- 24/7 Customer Support
- Get superb grades consistently
Online Academic Help With Different Subjects
Students barely have time to read. We got you! Have your literature essay or book review written without having the hassle of reading the book. You can get your literature paper custom-written for you by our literature specialists.
Do you struggle with finance? No need to torture yourself if finance is not your cup of tea. You can order your finance paper from our academic writing service and get 100% original work from competent finance experts.
While psychology may be an interesting subject, you may lack sufficient time to handle your assignments. Don’t despair; by using our academic writing service, you can be assured of perfect grades. Moreover, your grades will be consistent.
Engineering is quite a demanding subject. Students face a lot of pressure and barely have enough time to do what they love to do. Our academic writing service got you covered! Our engineering specialists follow the paper instructions and ensure timely delivery of the paper.
In the nursing course, you may have difficulties with literature reviews, annotated bibliographies, critical essays, and other assignments. Our nursing assignment writers will offer you professional nursing paper help at low prices.
Truth be told, sociology papers can be quite exhausting. Our academic writing service relieves you of fatigue, pressure, and stress. You can relax and have peace of mind as our academic writers handle your sociology assignment.
We take pride in having some of the best business writers in the industry. Our business writers have a lot of experience in the field. They are reliable, and you can be assured of a high-grade paper. They are able to handle business papers of any subject, length, deadline, and difficulty!
We boast of having some of the most experienced statistics experts in the industry. Our statistics experts have diverse skills, expertise, and knowledge to handle any kind of assignment. They have access to all kinds of software to get your assignment done.
Writing a law essay may prove to be an insurmountable obstacle, especially when you need to know the peculiarities of the legislative framework. Take advantage of our top-notch law specialists and get superb grades and 100% satisfaction.
What discipline/subjects do you deal in?
We have highlighted some of the most popular subjects we handle above. Those are just a tip of the iceberg. We deal in all academic disciplines since our writers are as diverse. They have been drawn from across all disciplines, and orders are assigned to those writers believed to be the best in the field. In a nutshell, there is no task we cannot handle; all you need to do is place your order with us. As long as your instructions are clear, just trust we shall deliver irrespective of the discipline.
Are your writers competent enough to handle my paper?
Our essay writers are graduates with bachelor's, masters, Ph.D., and doctorate degrees in various subjects. The minimum requirement to be an essay writer with our essay writing service is to have a college degree. All our academic writers have a minimum of two years of academic writing. We have a stringent recruitment process to ensure that we get only the most competent essay writers in the industry. We also ensure that the writers are handsomely compensated for their value. The majority of our writers are native English speakers. As such, the fluency of language and grammar is impeccable.
What if I don’t like the paper?
There is a very low likelihood that you won’t like the paper.
- When assigning your order, we match the paper’s discipline with the writer’s field/specialization. Since all our writers are graduates, we match the paper’s subject with the field the writer studied. For instance, if it’s a nursing paper, only a nursing graduate and writer will handle it. Furthermore, all our writers have academic writing experience and top-notch research skills.
- We have a quality assurance that reviews the paper before it gets to you. As such, we ensure that you get a paper that meets the required standard and will most definitely make the grade.
In the event that you don’t like your paper:
- The writer will revise the paper up to your pleasing. You have unlimited revisions. You simply need to highlight what specifically you don’t like about the paper, and the writer will make the amendments. The paper will be revised until you are satisfied. Revisions are free of charge
- We will have a different writer write the paper from scratch.
- Last resort, if the above does not work, we will refund your money.
Will the professor find out I didn’t write the paper myself?
Not at all. All papers are written from scratch. There is no way your tutor or instructor will realize that you did not write the paper yourself. In fact, we recommend using our assignment help services for consistent results.
What if the paper is plagiarized?
We check all papers for plagiarism before we submit them. We use powerful plagiarism checking software such as SafeAssign, LopesWrite, and Turnitin. We also upload the plagiarism report so that you can review it. We understand that plagiarism is academic suicide. We would not take the risk of submitting plagiarized work and jeopardize your academic journey. Furthermore, we do not sell or use prewritten papers, and each paper is written from scratch.
When will I get my paper?
You determine when you get the paper by setting the deadline when placing the order. All papers are delivered within the deadline. We are well aware that we operate in a time-sensitive industry. As such, we have laid out strategies to ensure that the client receives the paper on time and they never miss the deadline. We understand that papers that are submitted late have some points deducted. We do not want you to miss any points due to late submission. We work on beating deadlines by huge margins in order to ensure that you have ample time to review the paper before you submit it.
Will anyone find out that I used your services?
We have a privacy and confidentiality policy that guides our work. We NEVER share any customer information with third parties. Noone will ever know that you used our assignment help services. It’s only between you and us. We are bound by our policies to protect the customer’s identity and information. All your information, such as your names, phone number, email, order information, and so on, are protected. We have robust security systems that ensure that your data is protected. Hacking our systems is close to impossible, and it has never happened.
How our Assignment Help Service Works
1. Place an order
You fill all the paper instructions in the order form. Make sure you include all the helpful materials so that our academic writers can deliver the perfect paper. It will also help to eliminate unnecessary revisions.
2. Pay for the order
Proceed to pay for the paper so that it can be assigned to one of our expert academic writers. The paper subject is matched with the writer’s area of specialization.
3. Track the progress
You communicate with the writer and know about the progress of the paper. The client can ask the writer for drafts of the paper. The client can upload extra material and include additional instructions from the lecturer. Receive a paper.
4. Download the paper
The paper is sent to your email and uploaded to your personal account. You also get a plagiarism report attached to your paper.
PLACE THIS ORDER OR A SIMILAR ORDER WITH US TODAY AND GET A PERFECT SCORE!!!