Especialistas de Vela Case

Garcia has collected much of the information necessary to evaluate this proposal in Tables 1 and 2.

Table 1 Selected Data for Sailboat Proposal

(Currency amounts in € millions)

Initial fixed capital outlay 60Annual contracted revenues 60Annual operating costs 25

10

20

Economic life of facility (years) 3Salvage (book) value of facility at end of project 0Expected market value of facility at end of project 5

Table 2 Selected Data for Especialistas de Vela, S.A.

Book value of long-term debt/total assets 28.60%Book value of equity/total assets 71.40%

23.10%Market value of equity/market value of company 76.90%Coupon rate on existing long-term debt 8.50%Interest rate on new long-term debt 8.00%Cost of equity 13.00%Marginal tax rate 35.00%Maximum acceptable payback period 2 years

Pedro Garcia is a financial analyst with Especialistas de Vela, S.A., a Spanish manufacturer of sailboats. Garcia is evaluating a proposal for Especialistas de Vela to build sailboats for an Italian competitor that lacks production capacity and sells in a different market. The sailboat project is estimated to have about the same risk as Especialistas de Vela’s other projects.

The proposal covers a limited time horizon of three years—after which the competitor expects to be housed in a new, larger production facility. The limited time horizon appeals to Especialistas de Vela, which currently has excess capacity, but expects to begin its own product expansion in slightly more than three years.

Initial working capital outlay (recovered at end of the project)

Annual depreciation expense (both book and tax accounting)

Market value of long-term debt/market value of company

Garcia recognizes that Especialistas de Vela is presently financed at its target capital structure and expects that the capital structure will be maintained if the sailboat project is undertaken. Especialistas de Vela’s managers disagree, however, about the method that should be used to evaluate capital budgeting proposals.

One of Especialistas de Vela’s vice presidents asks Garcia the following questions:

1. The weighted average cost of capital for Especialistas de Vela is: Step by step calculations are need with explanations

A. 10.78%. B. 11.20%. C. 11.85%. D. 11.96%.

A. 33.00. B. 39.75. C. 43.00. D. 44.75.

A. 18.5%. B. 19.7%. C. 20.3%. D. 24.7%.

2. The total net cash flow (€ millions) for the sailboat project in its terminal year is:

3. The IRR for the sailboat project is:

4. Will projects that meet a corporation’s payback criterion for acceptance necessarily have a positive net present value (NPV)?

Garcia has collected much of the information necessary to evaluate this proposal in Tables 1 and 2.

Pedro Garcia is a financial analyst with Especialistas de Vela, S.A., a Spanish manufacturer of sailboats. Garcia is evaluating a proposal for Especialistas de Vela to build sailboats for an Italian competitor that lacks production capacity and sells in a different market. The sailboat project is estimated to have about the same risk as Especialistas

The proposal covers a limited time horizon of three years—after which the competitor expects to be housed in a new, larger production facility. The limited time horizon appeals to Especialistas de Vela, which currently has excess

Garcia recognizes that Especialistas de Vela is presently financed at its target capital structure and expects that the capital structure will be maintained if the sailboat project is undertaken. Especialistas de Vela’s managers disagree,

One of Especialistas de Vela’s vice presidents asks Garcia the following questions:

Step by step calculations are need with explanations

4. Will projects that meet a corporation’s payback criterion for acceptance necessarily have a positive net present