Capital expenditure decisions
Case Background
Thousands, perhaps millions, of Capital expenditure decisions are made by businesses every day. These decisions require leaders to use both accurate financial analyses, and critical thinking based on their awareness of markets, the economy, and their own organizations. This week’s assignment will place you in one of these exciting scenarios.
You are a financial analyst at Green Energy Venture, an investment firm focused on renewable energy projects. One of the prospective projects is a wind farm venture, the Winds of Change, expected to last for 20 years.
The project requires an upfront investment of $10 million. The expected annual net cash inflows from selling the power generated by the wind farm are estimated at $1.2 million for the first five years, increasing to $1.5 million for the subsequent 15 years.
Your task is three-fold:
- Evaluate the attractiveness of this investment opportunity by using three common methods of ROI: Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR). The company\\\’s hurdle rate (discount rate) for similar risk projects is 8%.
- Calculate the Weighted Average Cost of Capital (WACC) for the venture using the following information.
- Winds of Change is planning on using 20% debt and 80% equity to fund operations.
- The beta of the company’s stock is 1.25.
- The average interest rate on the company’s debt is 5%.
- The interest rate of a risk-free Treasury bill is 3%; a typical investment on the stock market returns 11%.
- The company\\\’s tax rate is 23%.
- Based on your calculations, which method would you recommend the company to use for this decision? Why? Describe the strengths and weaknesses of each method.
Remember, there is no single right method. Each method may lead to a different decision, and your role is to analyze and articulate why you would choose one method over the others
Requirements: no limit
Answer preview to Capital expenditure decisions
APA
1500 WORDS
