M212: Financial Management – WACC

Financial Analysis on CRG Woodworks – Weighted Average Cost of Capital

CRG Woodworks' owner Mr. Perez, is contemplating expanding its business because of
some business proposals from several interested partners in the area. The company is targeting to
increase its production volume by 30% to serve its projected expansion fully.

Anent to this, there are two (2) projects that Mr. Perez is looking into. Project 1 is to
acquire additional machinery & equipment and additional working capital to serve the necessary
production volume. Meanwhile, Project 2 is to outsourced additional production volume through
a partnered firm.

With these, the weighted average cost of capital analysis to assess the projects' financial
efficiency is presented. Below detail the figures derived from the financial statements of the
company:
C O ST O F EQ UITY 80%
C O ST O F DEBT 20%
% C o st o f Eq uit y 15%
% C o st o f De b t 12%
Ta x Ra t e 32%
WACC 13.63%

Given the calculated WACC, the projects will be evaluated as follows:

Pa rtic ula rs PROJECT 1 PROJECT 2

PRO J EC TED RETURN 16% 24%
WAC C 13.63% 13.63%
WEALTH CREATED 2.37% 10.37%

The table above clearly shows the company should consider Project 2 as the company can
yield 10.37% returns on every peso it invests in the said project. Moreover if the projected cost
of investment for Projected 2 five years from now is around PhP6.5 Million. We can use the
calculated WACC as a discounted cash flow to calculate the present value at around PhP3.9
Million.