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For our final assignment, please apply MS-Excel spreadsheets to solve the (A) WA

ID: 2617199 • Letter: F

Question

For our final assignment, please apply MS-Excel spreadsheets to solve the (A) WACC, (B) Internal Rate of Return, and (C) Net Present Value of a miniature golf course project under consideration.

You may discuss key concepts with your team member, but you should work on this assignment on an individual basis

 

For submission, please prepare two files to upload.

The first file is an MS-Excel file with functions applied to solve the problems, as we introduced in class. The second file is an MS-Word (or text/PDF) file to provide your answers and discussion of this question.

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Outdoor Sports is considering adding a miniature golf course to its facility. Given the following information for Outdoor Sports, please find the (A) WACC, (B) Internal Rate of Return, and (C) Net Present Value of this project. Assume the company's tax rate is 34 percent.

 

[Project]

 

The miniature golf course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project.

 

[Financial data]

 

Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make semiannual payments.

 

Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1.21.

 

Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently selling for $76 per share.

 

Market: 8 percent market risk premium and 5.1 percent risk-free rate.

Explanation / Answer

Calculation of WACC

Cost of debt semiannual

Using rate function in MS excel

rate(nper,pmt,pv,fv,type)

4%

4.05%

Annual rate

4.05*2

8.1

after tax cost of debt = cost of debt*(1-tax rate)

8.1*(1-.34)

5.35

cost of common stock

risk free rate+(market risk premium)*beta

5.1+(8)*1.21

14.78

cost of preferred stock

preference dividend/market price

6.35/76

8.36%

WACC

source

value

weight

cost

weight*cost

debt

7725000

0.324976

5.35

1.737321

common stock

15210000

0.639855

14.78

9.457061

preferred stock

836000

0.035169

8.36

0.294012

23771000

WACC

sum of present value of cash flow

11.49

cost of golf course

-138000

working capital

-3000

cash outflow

-141000

annual benefits

annual income

72000

add saving from other facilities

14000

total income from golf course

86000

less variable cost

24000

less fixed cost

11600

less depreciation

138000/5

27600

operating profit

22800

less tax -34%

7752

after tax savings

15048

add depreciation

27600

net operating annual savings

42648

Year

0

1

2

3

4

5

cash outflow

-141000

annual savings

42648

42648

42648

42648

42648

working capital

3000

net operating annual savings

-141000

42648

42648

42648

42648

45648

present value of net operating savings

-141000

38252.76

34310.48

30774.49

27602.92

26499.77

NPV =sum of present value of cash flow

16440.43

IRR=using irr function in MS excel

16.02%

Calculation of WACC

Cost of debt semiannual

Using rate function in MS excel

rate(nper,pmt,pv,fv,type)

4%

4.05%

Annual rate

4.05*2

8.1

after tax cost of debt = cost of debt*(1-tax rate)

8.1*(1-.34)

5.35

cost of common stock

risk free rate+(market risk premium)*beta

5.1+(8)*1.21

14.78

cost of preferred stock

preference dividend/market price

6.35/76

8.36%

WACC

source

value

weight

cost

weight*cost

debt

7725000

0.324976

5.35

1.737321

common stock

15210000

0.639855

14.78

9.457061

preferred stock

836000

0.035169

8.36

0.294012

23771000

WACC

sum of present value of cash flow

11.49

cost of golf course

-138000

working capital

-3000

cash outflow

-141000

annual benefits

annual income

72000

add saving from other facilities

14000

total income from golf course

86000

less variable cost

24000

less fixed cost

11600

less depreciation

138000/5

27600

operating profit

22800

less tax -34%

7752

after tax savings

15048

add depreciation

27600

net operating annual savings

42648

Year

0

1

2

3

4

5

cash outflow

-141000

annual savings

42648

42648

42648

42648

42648

working capital

3000

net operating annual savings

-141000

42648

42648

42648

42648

45648

present value of net operating savings

-141000

38252.76

34310.48

30774.49

27602.92

26499.77

NPV =sum of present value of cash flow

16440.43

IRR=using irr function in MS excel

16.02%