1. Weighted Average Cost of Capital (WACC). Explain why only some components of

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1. Weighted Average Cost of Capital (WACC). Explain why only some components of

1. Weighted Average Cost of Capital (WACC). Explain why only some components of the firm are included when computing financial costs. Concentrate on choice between project/divisional cost of capital versus a firm-wide cost of capital approach. (400 words)
2. Principals for Cash Flow Estimation
a) consider one complement sold within each franchise and one substitute (200 words)
b) Explain wether this decision will change operation cash flow with the fixed assets given (100 words)
Evaluate
a) Present evaluation of this acquisition and apply investment decision rules selected and provide a summary of benefits and limitations of these capital budgeting techniques. (500 words)
b) Supply recommendation on the acceptability of invest,ent in this project based on preceding categories of information. elaborate on the LIMITATIONS of the above analysis and INCLUDE further sources of information you would like to make a more informed decision. (400 words).
Case:
Coffee and snack shops are popular in the U. S. and are a growing industry with almost $60 billion market wide. Demand for those with disposable income is increasing. Because of this increase, the competition is high (locally as well). Small businesses and large businesses are in competition together and when a new trend or consumable good is introduced and becomes popular, it creates a “mushroom” trend within the area.
Fictitious company (Company X) allows franchisees to market a set brand of items under specific conditions. Brands managed by Company X include frozen ice cream, waffles, pretzels, crepes, moxtails and other food/drink related items.
Assume you are the CFO of Company X. You plan to purchase a content management system (CMS) to create and manage digital content. This system will do the following: 1) improve employee training and satisfy client training needs. Training will be interactive, social, gamified to provide incentive to complete the training. It will also be able to be modified based off the needs of the franchisees products, locations, and compliance requirements. 2) meet the unique financial needs of the parent firm and the franchise operators.
Company X has reviewed project-specific and firm-wide approaches to determining a weighted average cost of capital to utilize in valuing this project. It has determined that this project has lower-specific risks than other projects in which the firm is involved. Here is the developed capital budgeting criteria based on expected project cash flows:
Interest rate: 11%
max allowable payback (PB): 3 years
discounted payback (DPB): 3.5 years
The CMS will be projected to increase franchise fees and revenues with normal project cash flows shown as follows:
0 years at $235,000; 1 year at $65,800; 2 years at $84,000; 3 years at $141,000; 4 years at $122,000; 5 years at $81,200
Applying Net Present Value (NPV), Payback Period (PB), Discounted Payback Period (DPB), and Internal Rate of Return (IRR) as capital budgeting methods and discounting at a rate of 11%, you have evaluated NPV, PB, DPB, and IRR. You have found the following decision rule call for acceptance or rejection of the project as follows:
*Interpret results for the various capital budgeting criteria.
Payback Period Chart:
See attachment, 1, 2, and 3.
Requirements
1. WACC
Why is one component of weighted average cost of capital calculated differently if project risk differs significantly from risk of exiting projects, than it is when a risk does not differ significantly from risk of existing projects?
2. Principles of cash flow estimation
explain how each of the two explain Company X NVP estimates:
a. one compliment product or service sold within each franchise location
b. one substitute establishment (a competing establishment attracted by your success)
Evaluate Investment Criteria
1) Managers generally understand that capital budgeting decision rules complement each other when used together. Apply two decision criteria listed here (NPV, PD, DPB, or IRR) to determine if Company X should accept or reject the project.
2) Explain the limitations of the criteria (NPV, PD, DPB, or IRR) chosen to evaluate the acceptability of this CMS.

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