Case Study: Cost of Capital – WACC
You will use the following case study for this assignment- A PDF version of this case study has been uploaded for reference
Kunz, D., Dow, B., III. (2010). Cape Chemical: Capital budgeting issues (Links to an external site.). Journal of the International Academy for Case Studies, 16(5), 133-137.
Case Summary:
This case is primarily a capital budgeting expansion project for the company, Cape Chemical, which has done very well in the past in terms of sales and profits growth, and now needs to expand. Furthermore, the sudden withdrawal of one key competitor from the region has opened the opportunity for Cape Chemical to increase its market share. Unfortunately, the company was already operating at its maximum. So, the company needs to expand its work force and storage capacity and acquire more equipment. However, the company has no set process for capital expenditure evaluation in place. The company is unsure whether it should buy used or new equipment. Although the used equipment costs significantly less, it has an economic life of just three years, while the new equipment will last seven years.
Your task is to conduct a cash flow analysis for each alternative and provide recommendations to Cape Chemical. This case study has two sections; the first part looks at the weighted average cost of capital (WACC), and the second extends to capital budgeting.
For this assignment, you are required to answer only questions 1-3.
Your well-written paper should answer questions 1-3 and meet the following requirements:
Provide at least one paragraph of supporting explanation in response to each question, APA format, word document
Provide an Excel spreadsheet with solutions to each question on a separate worksheet; formulas in the spreadsheet must be linked; each worksheet should be clearly labeled (e.g., “Question #1,” “Question #2,” etc.); and each spreadsheet must be embedded in the Word document
