Case Questions

1. What are the appropriate costs of capital for the GPS transmitter and surveillance aircraft
projects?

GPS Transmitter Projections

Average Beta 1.666
Premium 5%
Cost of Equity 12.33%
Cost of Debt 2%
Weighted Equity 60%
Weighted Debt 40%
WACC 7.96%

WACC = ( ) + ( )(1 )
+ +

WACC = (0.6) (12.33%) + (0.4) (0.02) (1-0.03)

= 7.96%

Surveillance Aircraft Projections

Average Beta
Premium
Cost of Equity
Cost of Debt
Weighted Equity
Weighted Debt
WACC
2. What are the net present values of the two projects?

GPS Transmitter Projections

Selling and
Corporate Administration software
Year Units Sales Cost of good sold Overhead Cost mainatenane CF before tax Tax CF after tax Initial cost NPV
1 5000 2,500,000.00 (1,750,000.00) (250,000.00) (750,000.00) (50,000.00) (300,000.00) (90,000.00) (390,000.00) 2,500,000.00 $ (611,011.01)
2 5500 2,750,000.00 (1,925,000.00) (250,000.00) (750,000.00) (50,000.00) (225,000.00) (67,500.00) (292,500.00)
3 6050 3,025,000.00 (2,117,500.00) (250,000.00) (750,000.00) (50,000.00) (142,500.00) (42,750.00) (185,250.00)
4 6655 3,327,500.00 (2,329,250.00) (250,000.00) (750,000.00) (50,000.00) (51,750.00) (15,525.00) (67,275.00)
5 7320.5 3,660,250.00 (2,562,175.00) (250,000.00) (750,000.00) (50,000.00) 48,075.00 14,422.50 62,497.50
6 8052.55 4,026,275.00 (2,818,392.50) (250,000.00) (750,000.00) (50,000.00) 157,882.50 47,364.75 205,247.25
7 8857.805 4,428,902.50 (3,100,231.75) (250,000.00) (750,000.00) (50,000.00) 278,670.75 83,601.23 362,271.98
8 9743.586 4,871,792.75 (3,410,254.93) (250,000.00) (750,000.00) (50,000.00) 411,537.83 123,461.35 534,999.17
9 10717.94 5,358,972.03 (3,751,280.42) (250,000.00) (750,000.00) (50,000.00) 557,691.61 167,307.48 724,999.09
10 11789.74 5,894,869.23 (4,126,408.46) (250,000.00) (750,000.00) (50,000.00) 718,460.77 215,538.23 933,999.00
Total 1,888,988.99

Sales = Unit $500

COGS = Unit $350

Surveillance Aircraft Projections

Selling and
Corporate Administration
Year Units Sales Cost of good sold Overhead Cost CF before tax Tax CF after tax Initial cost NPV
1 250 15000000 (13,500,000.00) (750,000.00) (2500000.00) (1,750,000.00) (525,000.00) (2,275,000.00) 2,500,000.00 19,925,000.00
2 500 30000000 (27,000,000.00) (750,000.00) (2500000.00) (250,000.00) (75,000.00) (325,000.00)
3 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
4 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
5 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
6 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
7 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
8 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
10 1000 60000000 (54,000,000.00) (750,000.00) (2500000.00) 2,750,000.00 825,000.00 3,575,000.00
Total 22,425,000.00

Sales = Unit $60,000

COGS = Unit $54,000

3. Which projects would you recommend to the NPRC? Why?