Capital Project Analysis

As the financial analyst of your chosen company, your finance director has requested that you perform a project analysis for the firms product line expansion using the following data. Be sure to show your analysis.

Consider an expansion cost of $20,000,000 that is depreciated on a straight-line basis over its five- year tax life and has a salvage value of $6,000,000. In the first year, the project will require a working capital investment of $800,000, which will be recovered (liquidated) in Year 5. The additional revenues from the project in Year 1 will be $10,000,000.

• Using only the new project:
  • Develop five-year annual income statements and projected cash flow for each year.
  • Data for your projections are as following:
    • Revenues or Salesincreasing by 10% each year.
    • Operating Expenses excluding depreciation are 90% of revenues each year.
    • Calculate the annual depreciation expense for the project based on the initial cost, the salvage value, and straight-line depreciation over the five-year period.
    • Tax RateUse a fixed tax rate of 23.5%.
    • Discount rate- Cost of capital or WACCUse the weighted average cost of capital that was developed in week four to analyze the acceptance or rejection of this project.

In your paper, provide the following (show all calculations):

• Develop the initial cash outlay for the project.
• Create the future net operating cash flows in Years 1,2,3,4 and 5 for the project.
• Develop the terminal value or the non-operating cash flow in Year 5.
• Use the cost of capital that was computed in week four to determine if the capital project should be implemented. Explain your reasoning.
• Discuss the principal advantages and disadvantages for the use of scenario analysis and simulation analysis and its impact on your chosen company capital budgeting project decision.

The Capital Project Analysis Final Paper

• Must be five to eight double-spaced pages in length (not including title and references pages and formatted according to APA style as outlined in the UAGC Writing Centers APA Style (Links to an external site.) resource.
• Must include a separate title page with the following:
  • Title of paper
  • Students name
  • Course name and number
  • Instructors name
  • Date submitted
• For further assistance with the formatting and the title page, refer to APA Formatting for Word 2013 (Links to an external site.).
• Must utilize academic voice. See the Academic Voice (Links to an external site.) resource for additional guidance.
• Must include an introduction and conclusion paragraph. Your introduction paragraph needs to end with a clear thesis statement that indicates the purpose of your paper.
  • For assistance on writing Introductions & Conclusions (Links to an external site.) as well as Writing a Thesis Statement (Links to an external site.), refer to the UAGC Writing Center resources.
• Must use at least five credible sources in addition to the course text.
  • The Scholarly, Peer Reviewed, and Other Credible Sources (Links to an external site.) table offers additional guidance on appropriate source types. If you have questions about whether a specific source is appropriate for this assignment, please contact your instructor. Your instructor has the final say about the appropriateness of a specific source for a particular assignment.
• Must document any information used from sources in APA style as outlined in the UAGC Writing Centers Citing Within Your Paper (Links to an external site.) guide.
• Must include a separate references page that is formatted according to APA style as outlined in the UAGC Writing Center. See the Formatting Your References List (Links to an external site.) resource in the UAGC Writing Center for specifications.

Carefully review the Grading Rubric (Links to an external site.) for the criteria that will be used to evaluate your assignment.

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