Case Study 1 Essay examples

The next step was to determine the cost of debt and cost of equity. Case assumptions made by Liedtke of a 40% corporate tax rate, 6% estimated cost of debt, and 20% leverage were used in calculating the cost of debt. The cost of debt was determined to be 3.6% (= Debt*(1-Tax Rate).

The rate of return on total assets ratio is an indication of a company’s ability to effectively uses its assets to generate earnings. The formula for calculating this is net income added to interest expense divided by average total assets. DHG has a current rate of return on total assets of 13.71% for year 11. This compared to the rate of return on total assets of 12.30% in year 10 and the industry quartiles of 17.2%, 12.30%, and 8.60% indicates a strength for DHG. Management needs to continue leveraging the company’s assets to generate additional earnings.

Using a 10 percent discount rate, the net present value of all benefits is $1,645,201.46; the net present value of all costs is $1,576,173.19; the overall net present value is $69,028.27, and the project breaks even in approximately 4.04 years.

If the alternatives where independent of each other and the funding was available it would be advised to choose the outdoor grill. It has been proven that the investment involving the outdoor grill will be profitable and will generate a NPV larger than the initial investment, which would result in potential profit. But the investment involving the outdoor smoker produced a negative NPV given the initial requirements, so in order for this to be profitable alterations need to be made in order to generate a positive NPV. The discount rate will need to be altered in order to generate a positive NPV for the outdoor smoker. If the discount rate is decreased slightly from almost sixteen percent to thirteen percent this will generate a

has incurred $8 million in R&D costs - $5 million has come from the company’s internal funds and $3 million has been covered by the EPA’s “Garbage for the Future” grant program. The project is expected to generate operating cash flows of $10, $15, $25, and $20 million in years 1 through 4. In addition to the initial outlay of $40 million required to build the plant (it will be fully depreciated and worthless by the end of the fourth year), Sandbox Inc. will need to increase its stock of NWC by $5 million at the beginning of the project and then by another $5 million at the end of year 2. Assuming a discount rate of 10%, the NPV of the project is: A) $6.63 million B) $11.63 million C) $11.48 million D) $8.21 million E) $10.76 million

This method is the most precise method in comparison to the Venture Capitalist method despite the notion that there is an uncertainty of cash flow projections. Using WACC to calculate the discount rate assisted in the calculation of the

• What risk-free rate and risk premium did you use to calculate the cost of equity?

To estimate the cost of equity, we need to compute the beta of equity for each division using comparable companies. As the betas of debt were not provided, we made 2 assumptions: a. same business lines have the same beta of debt; b. Expected return of debt = Rf + βb*[E(Rm) – Rf*(1-T)] (Rf: risk free rate, E(Rm): expected

Using CAPM the required return on equity and the cost of equity is 18.05%. With an after tax cost of debt of 5.85%, WACC is 13.78%

We must then calculate the CAPM for the cost of equity (see Excel sheet for details):

NPV helps us to find out either the cost of capital we invest in a project for long term is feasible or not.

Tetra Pak Case study The challenge of intimacy with a key customer  Content  Company Profile  Performance Evaluation  Marketing Challenges  Solutions Assessment  Implementation Proposition Content  Company Profile  Performance Evaluation  Marketing Challenges  Solutions Assessment  Implementation Proposition Tetra Pak – Company profile Establishment: 1952. Founder: Dr. Ruben Rausing.

For all three alternatives there are the following assumptions: project 6 will be included in the portfolio, either project 7 or project 8 can be chosen, not both—sales and distribution cannot handle it—and all portfolios have a budget of €80. Project 6 is choose because while it has no formal NPV it can be considered an investment of €4 million now to save a cost of €10 million in four years. On the surface, it is clear that €10 million is two and a half times the cost of €4 million, but these costs are at different times. To determine whether or not the company should actually pay the €4 million today, is to find the PV of €10 million dollars. At the company’s WACC (10.5%), the PV =

(d) Determine the NPV for each of these projects? Should they be accepted? Explain why? 1. Net Present Value (NPV) for project A @ 12%; Years 1 2 3 4 Net Cash flow (NCF) £000 20 30 40 50 Cost of Capital @ 12% 0.893 0.797 0.712 0.636 Present Value £000 17.86 23.91 28.48 31.8 2

NPV shows the difference between an investment’s present value of costs and its present value of benefits, and is calculated using a market-based discount rate. This valuation requires estimating the size and timing of all the incremental cash flows from the project. The NPV is greatly affected by the discount rate, so selecting the proper rate–sometimes called the hurdle rate–is critical to making the right decision.