To: The Management Team of Pleasure Craft INC.

From: Group A+

Subject: Expanding Production

Date: September 29, 2010

Since beginning 40 years ago, Pleasure Craft INC. has been successful in both the domestic and international marketplace. Currently producing two products, snowmobiles and personal watercraft, both of which have become mature markets and thus giving little room to grow, two options have been determined to further the growth of Pleasure Craft INC.. First being to start production on outboard motors. This option allows Pleasure Craft INC. to remain in a familiar market, utilizing current contacts and sales tactics. The second option draws upon Pleasure Craft INC.’s experience with small …show more content…
The beta measures the responsiveness of the project’s return versus the return on the market. Based on the data that was collected about the market Pleasure Craft INC. currently operates in the beta, cost of equity and debt, WACC, NPV and IRR.To determine the beta of the front end loader project first the unleveraged beta of all five companies, then the average of the unleveraged beta needs to be calculated. With that information the beta of theis project was determined to be the value of 1.53. As this is a high beta value (over a value of 1), it has great volatility in the market making this option a risky option to venture into.

The market risk premium was calculated based on the collected stock and bond indices information. And after calculating, the market risk premium is 4.97%.

By using the Capital Asset Pricing Model, the cost of equity was calculated at 13.60%.

The cost of debt was 8.62%.

The Weighted Average Cost of Capital (WACC) was calculated using a debt to equity ratio of 3:7. The result being 11.14%.

The Net Present Value was the difference between an investment’s market value and its cost. In this case, the NPV value for the front-end loader project was $13,684,491.59. Which is a positive value for the company. The project was acceptable, however, the IRR of the project was 5%. The IRR rule states that an investment is acceptable if the IRR exceeds the required return.

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