Capital budgeting

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Final Project, Section IV) assignment.  Based on the in-class handout discussed on Monday, October 16, perform a capital budgeting analysis for HD.  More specifically, use the spreadsheet and the following inputs provided.

 

FCF’s for the five years as:

 

FCF1 = $50,000,000

FCF2 = $45,000,000

FCF3 = $65,500,000

FCF4 = $55,000,000

FCF5 = $25,000,000

 

And the operating costs:

 

OPC1 = 25,500,000

OPC2 = 25,500,000

OPC3 = 25,500,000

OPC4 = 25,500,000

OPC5 = 25,500,000

 

As noted in the instructions in the spreadsheet, assume HD’s WACC = 8% and it uses straight line depreciation when evaluating capital projects.

 

  1. Determine the NPV for this project. Based on your NPV, should HD accept or reject the project?  Briefly explain why it should accept or reject this project based on its NPV.

 

  1. Determine the IRR for this project. Based on your IRR, should HD accept or reject the project?  Briefly explain why it should accept or reject this project based on the IRR.

 

  1. Why do financiers/analysts use the WACC for new projects, and also explain why analysts use the term “hurdle rate” when it comes to a firm’s WACC?

 

  1. What happens to a project’s NPV if the WACC increases? Briefly explain why this is the case.

 

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