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rickgrimes
LSU Fan
Member since Jan 2011
2999 posts

Where can I find the cost of capital of my company?
I am trying to justify doing a project that has the following cash flows:

0 (16666.67)
1 3962.19
2 3962.19
3 3962.19
4 3962.19
5 3962.19
6 3962.19
7 3962.19
8 3962.19
9 3962.19
10 3962.19
11 3962.19
12 3962.19
13 3962.19
14 3962.19
15 3962.19

I am trying to calculate the NPV of the above cash flows. But I have no idea what I can use for cost of capital/interest rate 'r' in my NPV calculation to discount it back to today's dollars. Is there a standard rate used by different publicly traded companies by industry/sector etc.? If so where can I find this information?

I am an engineer dabbling in finance trying to make a case to my managers. So go easy on me if this is a stupid question.
This post was edited on 4/3 at 9:03 pm

foshizzle
LSU Fan
Washington DC metro
Member since Mar 2008
32454 posts

re: Where can I find the cost of capital of my company?
Ideally you would use the cost of capital of the lowest-performing project today. But you probably don't know that. Instead you could find the IRR. But honestly I wouldn't fret about it too much beyond showing that the return is semi-reasonable and a reasonable way to deploy capital, especially if it makes use of plant equipment that would otherwise be idle.

Out of curiosity you have forecast cash flows to the penny. How are you able to do this?

C
LSU Fan
The Woodlands, TX
Member since Dec 2007
23264 posts

re: Where can I find the cost of capital of my company?
Isn't 15% pretty standard?

rlanders23
Member since Oct 2011
65 posts

re: Where can I find the cost of capital of my company?
Where's the capital coming from? If it's coming from the bank, I'd assume it'll be very cheap, but this will likely depend on your company's size, rating (if applicable). If I were in your shoes, I'd use something very low (in the 5% range), but I could be wrong.

If my quick math is right (worth checking), this project has a positive NPV as long as CoC is <10.75%, and therefore, in theory, should be pursued if other options aren't available. If there are other projects competing for the same capital, I think you'd just compare IRR and Cash on Cash multiple and make the call.

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Notro
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Alison Brie's Boobs
Member since Sep 2011
4594 posts

re: Where can I find the cost of capital of my company?

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windshieldman
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Member since Nov 2012
2428 posts

re: Where can I find the cost of capital of my company?

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Rockyn
LSU Fan
Tampa Bay
Member since Sep 2008
7405 posts
Online

re: Where can I find the cost of capital of my company?
IRR is 22.66%. There is your purist CoC threshold.

I am more concerned about your CF assumptions than your discount rate. This resembles a problem set.
This post was edited on 4/3 at 10:38 pm

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rickgrimes
LSU Fan
Member since Jan 2011
2999 posts

re: Where can I find the cost of capital of my company?
I am getting an IRR of 22.66% like others have already said. So as long as my Cost of Capital is less than 22.66%, I will have a positive NPV. In fact, I ran into somebody from our finance department in the parking lot and I spoke to him quickly about what I was trying to do and he said any number between 3 and 4 for the CoC should be good enough.

My cash flows are based on cost savings that the company can expect every year if we do the project. The decimals don't mean much really. The could be of tens of dollars if not hundreds in reality. But that is not the point. I want to show a positive ROI of doing the project.

I am actually trying to come up with an excel calculator so that others in the company can do the same type of analysis quickly. Here are some screen shots:

Bayou Tiger
LSU Fan
The Woodlands, TX
Member since Nov 2003
3374 posts

re: Where can I find the cost of capital of my company?
8-10 percent is a common assumption for cost of capital. My preference is to calculate the IRR as a quick check to see if the investment makes sense at first blush. If you do this, always do a quick check of undiscounted cash flow also, since value acceleration projects flip the interpretation of IRR. For that matter, my first step is always to calculate back-of-the-envelope undiscounted cash flow to see if I am even in the ballgame.

I wouldn't worry too much about your company's WACC. The real key is understanding your company's hurdle rates for its various types of investments.

Most likely the funding for a project will come out of an exisitng budget for capital investments or an operating budget. With budget constraints or an annual business plan your project must trump other projects more than it must trump a financing cost of capital.

Different project types may have different criteria they must meet.

Quick-hit expense projects may have hurdles like time to payout, while more significant capital projects may have hurdles such as IRR or PVR (PVR is value generated per dollar invested, in a rough sense).

Just ask around about where you will get the funding for the project, and the person or group that controls the purse strings will tell you how good your project needs to be and what you need to do to get the money.

ETA: But it is still good to ask around at your company about the appropriate discount rate to use for evaluation, which may resemble the company's WACC or even marginal cost of capital. There may even be a different discount rate to use for different types of projects in terms of risk or strategic/budget "bucket" (which I really dislike in most cases).
This post was edited on 4/4 at 12:28 am

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Bayou Tiger
LSU Fan
The Woodlands, TX
Member since Nov 2003
3374 posts

re: Where can I find the cost of capital of my company?
After glancing at your analysis, the fundamental assumption is that this investment will save you a constant amount of money for fifteen years.

A couple of pitfalls in these types of analysis are the duration of the benefits and the assumption of a free ride after the initial investment.

Is this a software program that might last six years before replacement? If so you can only take credit for those six years. Will the equipment need maintenance overhauls, maybe future upgrades? If so, then these costs and their timing need to be factored into the analysis.

But the duration of the benefits is crucial to creating value here, as you may have already realized through some sensitivity analysis. So make sure that your assumption is defendable and you have given thought to any preventative maintenance planning, sizing, or other upfront flexibility that will push out the benefits as far into the future as possible.
This post was edited on 4/4 at 1:03 am

rickgrimes
LSU Fan
Member since Jan 2011
2999 posts

re: Where can I find the cost of capital of my company?
Thanks for the feedback. All valid points.

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AthensTiger
LSU Fan
Athens, GA
Member since Jul 2008
1961 posts
Online

re: Where can I find the cost of capital of my company?
It appears your cost savings are in real dollars, no inflation. Do you expect the same \$3962 each year or will the costs inflate over time? If so, you should model inflation if you use the WACC for the discount rate.

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