5 provide examples of at least one of the following

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5. Provide examples of at least one of the following as it relates to the project: (5 pts each) a. Sunk Cost b. Opportunity cost c. Erosion 6. Explain how you would conduct a scenario and sensitivity analysis of the project. What would be some project-specific risks and market risks related to this project? (20 pts) Answers will vary, students should provide some examples related to forecasting risk or estimation errors on revenues or costs and erosion as project-specific, and changes in economic conditions (inflation, interest
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rates, political/legal risks) as well as new competitors as some market risks. Task 5: Cost of Capital AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like to determine it. You will assist in the process of obtaining this rate. 1. Compute the cost of debt. Assume AirJet Best Parts Inc. is considering issuing new bonds. Select current bonds from one of the main competitors as a benchmark. Key competitors include Raytheon, Boeing, Lockheed Martin, and the Northrop Grumman Corporation. a. What is the YTM of the competitor’s bond? You may use a number of sources, but we recommend Morningstar. Find the YTM of one 15 or 20 year bond with the highest possible creditworthiness. You may assume that new bonds issued by AirJet Best Parts, Inc. are of similar risk and will require the same return. (5 pts) Assume 6.9% for Boeing. b. What is the after-tax cost of debt if the tax rate is 34%? (5 pts) After tax cost of debt = Cost of Debt x (1-t) = 6.79% (1-34%) = 4.48% c. Explain what other methods you could have used to find the cost of debt for AirJet Best Parts Inc.(10 pts)
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  • Spring '11
  • Abner
  • Net Present Value, YTM, AirJet Best Parts Inc., AirJet Best Parts, AirJet Best Parts, Inc.

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