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Course Project Part II
Introduction
You will assume that

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Course Project Part II

Introduction You will assume that you still work as a financial analyst for AirJet Best Parts, Inc. The company is considering a capital investment in a new machine and you are in charge of making a recommendation on the purchase based on (1) a given rate of return of 15% (Task 4). Task 4. Capital Budgeting for a New Machine A few months have now passed and AirJet Best Parts, Inc. is considering the purchase on a new machine that will increase the production of a special component significantly. The anticipated cash flows for the project are as follows: Year 1 $1,100,000 Year 2 $1,450,000 Year 3 $1,300,000 Year 4 $950,000 You have now been tasked with providing a recommendation for the project based on the results of a Net Present Value Analysis. Assuming that the required rate of return is 15% and the initial cost of the machine is $3,000,000.

1. What is the project’s NPV? (10 pts)

2. Should the company accept this project and why (or why not)? (10 pts)

3. Explain how depreciation will affect the present value of the project. (10 pts)

4. Provide examples of at least one of the following as it relates to the project: (10 pts each) a. Sunk Cost b. Opportunity cost

Course Project Part II

Task 5: Risk and Investment Return

1.) Explain the difference between a low risk investment and a high risk investment. Give examples of investments that are low risk and also investments that are high risk. (15 pts.)

2.) Given the stock price of Air Jet Best Parts, Inc. is $50 per share with a dividend of $2.12. The price at the beginning of the year was $45 per share. Compute the investment return for this asset based on computing the following; (35 pts.)

a. Cash received- compute dividend yield (per chapter 10) b. Value of the Asset- compute capital gain yield (per chapter 10) c. Combine a & by above to come up with a total return for the investment

3.) What is the expected rate of return of a portfolio with the following 2 stocks; a. Stock A possible return is 25%, Stock B possible return is 20% (see pg. 345 for example). (15 pts.)

4.) Suppose that Air Jet Best Parts, Inc. had to make an unexpected announcement (surprise) to the public. What affect could this announcement have on its stock price? (15 pts.)

5.) Chose a publicly traded company of your choice. Look up the company stock and review the Beta coefficient. What does the Beta coefficient represent for the company? Will this have an effect on the risk, systematic or unsystematic? (20 pts.)