Please be as descriptive as possible and show all calculations/solutions.
Question 1:
As a financial advisor evaluating capital investment projects…
A.) What hurdle rate of return is appropriate to use when calculating NPV and under
which circumstances? That is the WACC (Weighted Average Cost of Capital) in
which reflects the average cost of raising funds from suppliers of capital.
B.) So what rate should an advisor use in evaluating a capital investment project for the
firm and why?
Question 2:
A large company purchased a piece of land five years ago for $150,000 and subsequently added
$175,000 in improvements. The current book value of the property is $225,000.
There are two options for future use of the land:
1.) The land can be sold today for $375,000 after-tax; or
2.) Your company can destroy the past improvements and build a factory on the land.
A.) In consideration of the factory project, what amount (if any) should the land be
valued at for purposes of the capital budgeting analysis? Explain your rationale.
Question 3:
Your company currently sells oversized golf clubs. The Board of Directors wants you to look at
replacing them with a line of super-sized clubs.
Briefly explain whether the following are relevant cash flows to this analysis and if so, how
those cash flows can affect any decision. Discuss each item individually.
A. $300,000 drop in sales from terminating the oversized line of clubs
B. $750,000 in land you own that may be used for the project
C. $200,000 spent on Research and Development last year on oversized clubs
D. $350,000 you will pay to Fred Singles to promote your new clubs
E. $125,000 you will receive by selling the existing production equipment which must
be replaced
