1. Business
  2. Finance
  3. business finance information to complete the second question read...

Question: business finance information to complete the second question read...

Question details

Business Finance - Information to complete the second question- read in full before completing

****** This has been solved- does not need to be worked on. Do not do the capital budgeting problem. It has already been completed

Capital Budgeting Problem.(dont do!) ABC Corporation is evaluating a new product. As assistant to the director of capital budgeting, and you must evaluate the project. The project would be produced in an unused building adjacent to ABC’s Sandusky plant; ABC owns this building which has an historical cost of $325,000 as well as accumulated depreciation of $325,000. Additionally, you learn that ABC renovated the building last year at a price of $125,000, expensing the cost. Required equipment for the project would cost $225,000, plus an additional $15,000 shipping and installation. Net working capital will amount to 8% of sales in the following year. The machinery is considered 5-year property for tax purposes--be sure to use MACRS.

   The project is expected to operate for 5 years, at which time it will be terminated. The cash inflows are assumed to begin one year after the project is undertaken, or at t=1 and to continue out to t=5. At the end of the project’s life (t=5) the equipment is expected to have a salvage value of $65,000. Unit sales are expected to total 138,000 units in the first year, 125,000 in the 2nd, 142,000 in the third and 126,000 and 96,000 in the final years. The expected sales price is $1.38 per unit. Cash operating costs for the project (i.e., excluding depreciation) are expected to total 60 percent of dollar sales. Overhead expenses to be allocated to the project are 1% of sales. ABC’s marginal tax rate is 29% and its required rate of return is 9.5%. Tentatively, the project is expected to be of equal risk to the corporation’s other projects. You have been asked to prepare a spreadsheet analysis and to calculate NPV, IRR, profitability index, and payback period. Assume your presentation is to a mixed group, i.e., some do not have business degrees. Briefly explain what NPV, IRR, PI and payback measure. Finally, provide a recommendation on the project.


After presenting your results to your boss, she asks that you perform sensitivity analyses. First, she asks that you adjust figures to see the impact on NPV only if sales price is either 10% higher or lower than the original. Second, consider the impact of a required rate (WACC) of 1.5% higher or lower than the base case. Finally, examine the impact of a 57% or 63% cash operating cost. Analyze & make a recommendation. Correct #’s are worth 60% and correct analysis of those numbers are worth 40% of this assignment.

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution