This increases your positive cash flows for the project and ultimately resulting in higher NPV. A company which opts for incremental method of depreciation will have higher cash flows in the initial years and it will reduce by the time it reaches its expiry. On the other hand, a company which opts for straight line method will have equal positive cash flows every year. Lastly, Depreciation of $10,000 per year, with an income tax of 40%, saves $4,000 and that amount is accounted as a positive cash flow. 5. Opportunity cost is the profit forgone by not investing in a particular opportunity. It is particularly pertinent to this project as the company may have other investment opportunities which they overruled for this particular investment. (Shim & Siegel, 2008)For example, if this money was not invested in the purchase of a machinery, it may have been deposited in a bank and earn a decent enough return without any substantial risk. Moreover, this could have been distributed among shareholders as dividend or the money could have been used to purchase any other equipment with different set of anticipated cash flows. Therefore, the cost of not depositing that money in the bank or distributing as dividend or not purchasing any other equipment is the opportunity cost of the project. 6. ...

Moreover, if interest rate rises than the cost of capital will increase which will eventually lead to lower returns. In addition to the above factors, if the cash flows are not the same as expected than the whole analysis would be redundant and may result in lower or higher returns. Lastly, we have assumed that the equipment stays in working condition for the time it is with us but this is not always true. Therefore, these factors should be accounted for before taking up the final decision. Task 5: Cost of Capital 1. a) Raytheon 20 yr bond from 1998-2018 of 6.4% coupon has a yield to maturity of 4.62%. (Morningstar, 2011) b) After tax cost of debt would be: c) There could be alternates to calculating cost of debt in this case. An approximate cost of capital can be found by adding up all the interest paid last year and divide that amount by debt outstanding. Another way could be adding all weighted debt cost to get an average cost of debt for the firm. d) Yield to maturity of a bond is equivalent to the internal rate of return earned by an investor. It is an actual estimation of future return, as it is the rate at which coupon payments can be reinvested when received is unknown. It equips an investor to compare the merits of different investment. On the other hand coupon payment doesn’t account the element of required return in it. It is difficult to infer the cost-benefit balance by looking at the coupon payment. 2. a) Raytheon beta = 0.68 Boeing beta= 1.22 Lockheed Martin beta=1.01 (Yahoo Finance, 2011) Average Beta= 0.97 b) CAPM provides linear relationship between risks associated with the return. The systematic risk involved is taken into account to provide its required rate of return. However; its assumptions do not match
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