Project Evaluation Assignment , You are a newly hired financial analyst with Gold Coast Water Company (GCWC), a company operating in Queensland, which specializes in bottling purified water sourced from Tambourine Mountains springs. GCWC is considering adding to its product mix a ‘healthy’ bottled water geared towards children, aimed at improving both its business focus and the return to shareholders. Scenario GCWC currently has 30,000,000 ordinary shares outstanding that trade at a price of $35 per share. GCWC also has 400,000 bonds outstanding that currently trade at $983.38 each. The company’s bonds have 20 year to maturity, a $1,000 par value and a 10% coupon rate that pays interest semi-annually.
GCWC has no preferred equity outstanding and has an equity beta of 2.21. The risk-free rate is 2.5% and the market is expected to return 10.52%. GCWC has a tax rate of 34%. The initial outlay for the new project is expected to be $5,000,000, which will be depreciated over the next 3 years using the straight line method to a zero salvage value, and sales are expected to be 1,650,000 units per year at a price of $2.05 per unit. Variable costs are estimated to be $0.62 per unit and fixed costs are estimated at $75,000 per year. The above estimations are valid for 3 years of project life after which a terminal value of $580,000 in year 3 is expected to cover all cash flows to be earned in the future. For the purpose of this project, working capital effects are ignored. GCWC’s CEO, Ben Waters, has asked the finance department if they consider such project to be an acceptable investment.
The CFO, Mrs. Alexandra Robinson, intends to evaluate the project based on the net present value approach. She agrees with Mr. Waters on the major assumptions that will affect these cash flows, but they disagree on the appropriate discount rate. Mr. Waters believes that they should use the company’s weighted average cost of capital (WACC), however, the CFO disagrees, arguing that the bottled water targeted at children has different risk characteristics from the company’s current products. She argues that the company’s WACC is inappropriate as a discount rate and they should instead use the ‘pure play’ approach and estimate a cost of capital based on companies that sell similar type of products. Mrs. Robinson obtains some data for several comparable companies as follows:
Company: Sunny Water
Cost of Equity 12.12%
Cost of Debt 7%
Tax Rate 32%
Company: Labrador Drinks
Cost of Equity 12.93%
Cost of Debt 7.55%
Tax Rate 34%
The CEO and CFO have decided to rely on your newfound expertise as to provide a recommendation on why the company’s WACC should not be used, and if not, what is the appropriate discount rate to be used in the appraisal of the new project.
Concerned about the forecasting risk of this project, they also ask that you perform a risk evaluation in the form of: – Sensitivity analysis for sales price, variable costs, fixed costs and unit sales at ±10%, ±20%, and ±30% from the base case, showing on a graph which variables are most sensitive; – Scenario analysis on the following two scenarios:
a) Worst Case: selling 1,250,000 units at a price of $1.75 and variable cost of $0.68 per unit;
b) Best Case: selling 1,750,000 units at a price of $2.25 and variable costs of $0.49 per unit. Based on the above analysis provide a recommendation whether GCWC should invest in this project. Get Finance homework help today
Why Work with Us
Top Quality and Well-Researched Papers
We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.
Professional and Experienced Academic Writers
We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.
Free Unlimited Revisions
If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.
Prompt Delivery and 100% Money-Back-Guarantee
All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.
Original & Confidential
We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.
24/7 Customer Support
Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.
Try it now!
How it works?
Follow these simple steps to get your paper done
Place your order
Fill in the order form and provide all details of your assignment.
Proceed with the payment
Choose the payment system that suits you most.
Receive the final file
Once your paper is ready, we will email it to you.
No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.
No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.
Admission Essays & Business Writing Help
An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.
Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.
If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.