Sara Doyle, Kevin Jackson, and Ali Lakhani
January 20, 2014
Pontrelli Recycling, Inc. has a mission to “increase the efficiency of recycling usable materials in order to create a better environment for all,” and to “create value and a fair return on investment for shareholders” (Callahan, Stetz, and Brooks, 2007). A project must always be aligned with the company’s strategy and financial goals. When devising any new project, a company can refer to many available resources for the information needed for the plan by reviewing financial sheets and documents. In the upcoming project for Pontrelli Recycling the high level cost estimate for the project is $8.8 million. In the following project plan overview, the details of the project will be reviewed. Debt and equity financing are two methods that may be employed by a company to obtain necessary capital for projects. Equity financing uses investors to obtain necessary funds. Equity financing does not have to be paid back like a loan and leaves more cash on hand for a company. While this method sounds appealing for those reasons, equity financing can lead to less control and ownership of a company, higher returns to be paid out to investors in the long run, and a longer financing process. Debt financing uses loans from banks or other financial institutions to acquire funds. By using debt financing, a company is able to maintain control and ownership of their company, use interest on the loan as a tax deductible, and plan for known repayment figures. Pontrelli Recycling can take advantage of the benefits of both of these methods for financing, and reduce their disadvantages by using both methods to fund their upcoming project. They can turn to investors for a portion of their financing and use banks for the other portion of financing. One major part of creating a project proposal is being able to measure the value of the company. Pontrelli Recycling will need to determine the value of their company to assist in determining credit worthiness, tax purposes, and to be able to present their current status to potential lenders or investors. To measure value, a company can use either the economic value added (EVA) or the market value added (MVA)approach. “Economic value added can be calculated as the difference between the company’s net operating profit after tax and a portion of the amount of capital invested in the business” while “the market value added can be calculated as the difference between the company’s market value and the amount of capital invested in the business” (Hanks, n. d.). The MVA measures the “operational capabilities of a company’s management” and the EVA measures the “opportunity cost of alternative investments,” and the company’s efficiency of management (Hanks, n. d.). Weighted Average Cost of Capital.
Weighed average cost of capital (WACC) is a composite of the individual costs of financing incurred by each capital source. The firm WACC is a function of (1) the individual cost of capital, (2) the capital structure mix, and (3) the level of financing necessary to make the investment (Titman, Keown, & Martin, 2011). WACC is calculated by multiplying the after cost of debt to the proportion of capital raised by debt. Multiply the cost of preferred stock to the proportion of capital raised by preferred stock, and then multiply the cost of common stock to the proportion of capital raised by common stock. The formula for WACC is: WACC= (after tax cost of debt X proportion of capital raised by debt)+(Cost of preferred stock X proportion of capital raised by preferred stock)+(Cost of common stock X proportion of capital raised by common stock).
The advantage of using the WACC method is it is familiar to mot business executives. The WACC minimizes estimation cost, as there is only one cost of capital calculation for the firm. In addition, using WACC reduces the problem of influence cost...
References: Callahan, K.R., Stetz, G.S., & Brooks, L.M. (2007). Project Management Accounting:Budgeting, Tracking, and Reporting Cost and Profitability . Hoboken, N.J.: John Wiley & Sons, Inc.
Eichenberger, J. (1998). Project management, part III budgets for projects. AAOHN Journal, 46(5), 268-70. Retrieved from http://search.proquest.com/docview/1013462577?accountid=35812
Hanks, G. (n.d.). Market Value Added Vs. Economic Value Added Chron.com. Retrieved January 18, 2014, from http://smallbusiness.chron.com/market-value-added-vs-economic-value-added-72854.html
Titman, S., Keown, A.J., & Martin, J.D. (2011). Financial Management:Principles and Applications (11th ed.). Boston, M.A.: Prentice Hall
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