– Recommended report size: 5 pages (excluding the cover page, the bibliography section and attachments)
– Structure, format and style: flexible
What you need to do is evaluate a real-life investment project currently being planned by one of the well-known international companies. You should utilize the newly acquired knowledge concerning capital budgeting and project evaluation when working on your approach and calculations. The ultimate goal would be to provide an opinion concerning the investment project’s attractiveness in terms of “accept” or “reject” the project. Both possible conclusions would be considered equally superior; it is not necessary to validate the project just because the company in question has done so.
Below are the sequential steps you are advised to follow:
1) Select a well-known international company (ideally, a public corporation)
2) Find an actual investment project your company is currently undertaking or is planning to undertake in the recent future.
3) Collect as much information as possible concerning the project you have identified through the company website, business and financial media (www.bloomberg.com, www.wsj.com, www.financialtimes.com, www.economist.com, etc.) and compile the project description section of your report (with major numbers only, concerning the initial investment, project duration, etc.)
4) Classify the chosen project (a multiple classification may be relevant) and describe its benefits for the company, the society and the environment.
5) Estimate the project’s discount rate as the weighted average cost of capital WACC of the company (my suggestion would be www.finance.yahoo.com). In order to calculate the after-tax cost of debt, be sure to find the following components:
a) company’s before-tax cost of debt (from knowing the company’s interest expense during the last fiscal year found in the income statement and the company’s total liability from the same year found in the balance sheet).
b) company’s tax rate, which could be indirectly calculated by dividing the income tax expense by the income before tax (EBT)
In order to calculate the cost of equity, be sure to use the CAPM model. Find the following components concerning the CAPM equation from the Internet:
a) the corresponding risk-free rate;
b) the expected rate of return on the stock market (or the market risk premium)
c) company “beta”
6) Estimate the project’s cash flows. Follow the cash-flow estimation template presented in Session 6 videos. Please note that you are allowed to make up the data pertaining to your project that you will not be able to find through research (please do your best to be reasonable concerning the assumptions). The most critical piece of information would be the first-year revenues, so do your best to come up with a reasonable number. From then on assume a steady revenue growth throughout the duration of the project (same growth rate), a straight-line depreciation method. In addition, in the absence of a better estimate, you may assume that the cost and expenses (excluding depreciation) would be equal to 50% of the expected revenues in each year. As for the project’s economic (useful) life, in the absence of relevant data, use your best judgement.
7) Once you have the project’s cash flows and the discount rate in place, use the following investment decision rules to make the decision concerning the project’s attractiveness to the company:
a) Discounted Payback Period
It would be a good way to end the report with the conclusion section summarizing your findings and recommendations concerning the project.
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