All analysis should be done in MS Excel, and a memo to your bossexplaining the situation, your
analysis, and conclusion should be prepared in MS Word. You mustupload both files to be graded.
You will only get full credit for the assignment if youranalysis is correct, all calculations and/or formulas
use cell references, and your memo has the right content, flowswell, and is properly formatted, and
grammatically correct. An example of a good memo, and an Exceltemplate is provided for your benefit.
You can add or delete columns in the excel template asneeded.
Playtan Corporation has a machine that either should be repairedor should be replaced soon.
You have recently been hired by Playtan and one of yourassignments is to help decide whether
replacing the machine, or repairing it is in the best interestof your company.
Investment required for repairing the machine is only $500,000and cost to replace the machine
is $3,000,000. Repairing the machine will cut down on the numberof returns from customers
and increase cash flows, while replacing the machine mayincrease the number of units sold.
Playtan has evaluated and calculated additional cash flows thatwill be generated under the two
scenarios over the next five years as follows:
Year
Cash flow (if repaired)
Cash Flow (if replaced)
1
197,000
1,613,000
2
160,000
1,185,000
3
178,000
978,100
4
139,000
997,800
5
117,000
990,000
Playtan does not accept projects that will pay back in more than3 years, or any projects that will not
maximize shareholder wealth. So, you will need to use allcapital budgeting techniques you’ve learnt in
your Finance class to ensure that the right option ischosen.
Cost of capital for the project (repair or replacement) could beanywhere from 8% to 14%, so you will
conduct your analyses at various weighted average cost ofcapital (WACC) or Required rate of return
points including at least five at 8%, 9%, 11%, 13%, and 14% forboth scenarios, and also draw an NPV
profile for both situation using your calculations.
Use your knowledge of capital budgeting and time value of moneyto decide which of the options is better
for Playtan. All analysis must be done in Excel. Your excelmodel should be such that it can be used by
Playtan or any other corporation for similar capital budgetingsituations – so anyone can change any
numbers and use the model again. This would require allcalculations to be using cell references and excel
functions. You must write a memo to your boss, explaining thesituation, your analysis, and your
conclusion. You must also explain the drawbacks of yourtechnique/s if there are any.
Make sure that all your submissions have your full name, class,and section number included.
