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As an analyst at monsters Inc you spend time reviewing the crazy investment opportunities your boss discovers. Today, your boss decided that in an effort to help you avoid worrying about anything except the financial decisions, you will not be told what line of business the deal in question involves. As such, you are being asked to make a financial decision based on the merits of the numbers without regard to exactly what type of business venture your crazy boss is contemplating. (This simplifies your thinking!) Key Operating Metrics for the Market and monsters inc used in your Analysis: 1. The mean historic return in the market for risky assets used for firm estimation of deal prospects is 8% annualized. Rm = .08 2. Risk-free rate (for all terms) = 1.50% Corporate Financial Conditions for Capital Analysis: i. LT Debt Par Value $1.0 Billion, Maturity T = 15 yrs, m =2, Coupon Rate = 6.0%, Current Price = 103.58 ii. Equity: Outstanding Shares = 100 million shares, Current Stock Price = $30 iii. Firm Beta (vs. Mkt portfolio) = 1.5 iv. Effective Tax Rate = 30% Use the information about monsters inc to answer the question about Project 2 Project 2: You are considering the purchase of a $2.0M machine with a life expectancy of 10 years. The new machine will increase gross revenue by $500,000 per year over the life of the project. At the end of 10 years the project machine will be salvaged for $300,000. Use the WACC you found for DCI a Risk-Premium of 5.0% to evaluate Project 2. 1. What is the NPV of Project 2? 2. Would you recommend Project 1 or 2 if you had to prioritize the use of capital? 3. If you did not use a Risk premium for the project what is the danger to the Company?


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