Expert answer:Capital budgeting analysis

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fin550_milestone_iii__section_iv__modified_17tw1.doc

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Instructions for Milestone #3 (Section IV)
The following additional information should be used when you write up your Milestone #3
(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.
2. 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.
3. 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?
4. What happens to a project’s NPV if the WACC increases? Briefly explain why this is the
case.
…
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