The director of finance has discovered an error in his WACC calculation. He did not factor...

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Finance

The director of finance has discovered an error in his WACCcalculation. He did not factor in the tax rate when determining thecost of debt. UPC has a line of credit at 4% interest, and thecompany is taxed at 30%. Further, assume that UPC’s required rateof return on equity is 14%, and its capital structure is 40% debtand 60% equity. Additionally, the budget committee question andanswer session revealed that UPC has discovered a technology thatwill increase its product life span by 1 year. The new technologywill add $120,000 and $130,000 to projects A and B’s initialcapital outlay, respectively. Further, the finance department hasdetermined that cash flows for years 1, 2, and 3 will be unchanged.However, net cash flows for year 4 will be $300,000 and $150,000for projects A and B, respectively. • In an Excel spreadsheet,using the UPC scenario, and the new information above, calculatethe NPV, IRR, MIRR, and payback periods from projects A and B. Youmust input all of your data into an Excel spreadsheet and show allformulas. • Using MS Word, explain any risk factors inherent in thebudgeting for the 2 projects.

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4.2 Ratings (835 Votes)

The cash flows are as belowYearProject ACumulative CFProject BCumulative See Answer

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The director of finance has discovered an error in his WACCcalculation. He did not factor in the tax rate when determining thecost of debt. UPC has a line of credit at 4% interest, and thecompany is taxed at 30%. Further, assume that UPC’s required rateof return on equity is 14%, and its capital structure is 40% debtand 60% equity. Additionally, the budget committee question andanswer session revealed that UPC has discovered a technology thatwill increase its product life span by 1 year. The new technologywill add $120,000 and $130,000 to projects A and B’s initialcapital outlay, respectively. Further, the finance department hasdetermined that cash flows for years 1, 2, and 3 will be unchanged.However, net cash flows for year 4 will be $300,000 and $150,000for projects A and B, respectively. • In an Excel spreadsheet,using the UPC scenario, and the new information above, calculatethe NPV, IRR, MIRR, and payback periods from projects A and B. Youmust input all of your data into an Excel spreadsheet and show allformulas. • Using MS Word, explain any risk factors inherent in thebudgeting for the 2 projects.