Ch5&6 Case Study - Capital Budgeting The company is looking at developing a new robot that not only folds boxes but can be adjusted to do any size boxes. This represents the first attempt at entering this market so the risk will be a more than the usual company investment. Review the company's WACC, then adjust it for the greater risk per the company's policy for more risky investments. Use that cost of capital to do a Capital Budgeting analysis of the project. Please find the NPV, IRR, MIRR and payback. Provide a recommendation based on the analysis as to whether the company should or should not proceed with the project. We have already spent $500,000 looking at this project. The project from this point forward will take an investment of $415,100,000. Fran Gooley, VP of Marketing, has given us the below data. Units to be sold Sales price/unit Variable cost per Fixed production Sales expense yr1 yri unit yr 1 cost yr1 yr1 10,000 $75,000 $65,000 $100,000 2% of sales She has forecasted the product life cycle for 5 years using a growth rate in units of 21%, 14%, 14%, and 10% for years 2 through 5 respectively. The sales price will remain flat for year 2 and then grow 5% each year for years 3, 4 and 5. Both variable cost per unit and fixed costs will grow at a steady 2% every year. The sales expense of 2% of revenue and the tax rate of 21% will remain for all years. As part of the initial investment production equipment of $80,000,000 will be bought and installed in 2021. There is no salvage value. (section 179.org to find 2021 equipment depreciation.) The company just issued new debt at an after-tax rate of 3.4% and its current cost of equity is 10.4%. Our debt to equity is currently 2:3 based on current market values. Use the WACC or cost of capital per the company's risk chart below: Least risky investment WACC minus 3% Less risky investment WACC minus 1% Base WACC calculated More risky investment WACC plus 3% Most risky investment WACC plus 5% The minimum for the discount rate for all company analysis is 10.5%. Page 1 of 2 365 words D Focus 10 + 100% Aurii 02 ch case study capcal budgeting521 - Search Joshualanc IF Fle Home Insert Page Layout Formula Data Review View FlarSwift Share Comments Calibri 11AA Annum - General ac Neutral Goud B EX 27 O 4 Paste X Cut Copy 3 rammet anter Clipboard ==. Wrap Text 5. Margo A Cante- 2 Normal Conditional Forma Calculation Formwiliny - Tell BIU- - %) A- Insert Deprem Check Cell Exploratory. Input Sortid File - St Sens Clear- Analysis Analysis Font Alignment Number IN Editing Sitty C E D F G 1 K M N o P 0 R S U V w 1 Case Study Capital Budgeting 2 3 Cashflow 4 5 Year Values 2 4 5 10.40 WACC Cost of equity Jaller-lax Cost of debt Eculty Debt% 3.005 606 40% WACC 7.GON 7 units & Sales Price 9 Total Sales 10 11 Variable Cost per Unit 12 Total Variable Oosts 13 Fixed Coste 14 14 Sales Expense 15 Depreciation 16 Operating Income 17 Taxes 18 Net Oper incatteries 19 add back depreciation 20 Operating Cash Flow Year 1 2 3 4 5 24 Depreciation of 25 20 Depreciation expense 27 Ending Book Value 28 31 33 34 36 37 cash flow projection DCF and payback 100 Type here to search E- N x 12:24 PM 2/22/2001 Aurii 0 ch case study capcal budgeting521 - e Search Joshualanc IF Fle Home Insert Page Layout Formula Data Review View FlarSwift Share Comments Calibri 11AA Annum - Gurural ac Neutral Goud B EX 27 X Cut Copy 3 Format Panter == 2 Wrap Text ===Merge Center 2 Normal Conditional forms Calculation Formwiling. Till BIU- A- Check Cell Exploratory input Insert Delete Sens Clear- Sortida Fitur-Sat Editing Analysis Ang Clipboard Font Alignment Number ST B25 B C D D F G H 1 K L M N O R 5 T. V W X Z 4A 1 WACC- 2 3 Cashflow 4 Investment 5 Year 2 6 Year 2 7 Year 8 Year 4 9 Years 10 11 NPV 12 MINR 13 IRE 14 Payback 15 16 Dayback 17 Investment 18 Year 1 Cash flow in 19 Year 2 Cash Flow in 20 Year 3 Cash Flow in 21 Year Cash flow in 22 Years Cash Flow in Balance Years 24 27 29 31 30 34 36 37 cash flow projection DCF and payback 100 Type here to search O E- IN x 12:23 PM 2/22/2011