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

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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 2^{nd}, 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.

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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

**of this assignment.**

*40%*