ASSIGNMENT | Assess Capital Budgeting Problems – Replacement Project

Write an assessment in which you address the following problems/questions:
1.Assess the relevant cash flows used in forming a capital budgeting decision model. For this assignment, focus upon a replacement problem.
2.Develop a capital budgeting decision model showing cash flows, cost of capital, and decision metrics (i.e., npv, mirr, irr, payback, and discounted payback). Form a conclusion based upon the analysis. Begin with the example problem on page 410 of the textbook, Table 12.2. Modify the problem in the following manner and develop the analysis within an Excel spreadsheet.

•Assume the costs except depreciation are uncertain for the new machine. Develop the analysis in a spreadsheet and evaluate the sensitivity of the results for costs of 300, 400 and 700.
•Assume straight-line depreciation on both machines.
•The cost of capital is calculated based upon funding from retained earnings and from debt. The company is assumed to fund itself with 40% debt and 60% retained earnings. The cost of debt capital, rD, is 8%. The cost of capital from retained earnings, rS, is based upon the capital asset pricing model. The risk free rate in the market is 3% and the difference between the expected return on the market and the risk free rate is 5%. The beta for the company is 1.5. The tax rate is assumed to be 40%.
•Assume all other assumptions as given.

Support your assessment with at least three (3) resources. In addition to these specified resources, other appropriate scholarly resources, including older articles, may be included. Your assessment should demonstrate thoughtful consideration of the ideas and concepts presented in the course by providing new thoughts and insights relating directly to this topic.

SAMPLE SOLUTION

It is always necessary for a company to first identify the economic viability of a project before investing in it. Capital budgeting forms part of a very important process that a company has to undertake before venturing into the business (Kuratko, 2016). This because it helps identify opportunities, risks, cost of capital among other important decision making tools. Most stakeholders rely on capital budgeting decision models to determine their economic engagements with any prospective company. Capital budgeting decision models rely on several cash flows as discussed below.
Cash expenses- In the daily operations of the company, the company spends its cash to ensure that all activities of the company run smoothly. This cash constitute cash…