Mini Case on page 329-330 Calendonia - 90072

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Mini Case on page 329-330, parts "a" to "d," summarize your analysis in a concise management statement not to exceed a total of 1,200 words. For parts "e" to "k," use formulas to calculate the ratios and format the cells to insert a comma if there is more than three numbers. Round to the nearest whole number. Clearly label your analysis and your conclusions in not more than 500 words. Mini Case: We are considering the introduction of a new product. Currently we are in the 34% marginal tax bracket with a 15% required rate of return or cost of capital. This project is expected to last 5 years and then, because this somewhat of a fad product, be terminated. The following information describes the new project. Cost of new plant & equipment= $7,900,00 Shipping and installation costs=$100,000 Unit Sales: Year 1 units sold 70,000 Year 2 units sold 120,000 Year 3 units sold 140,000 Year 4 units sold 80,000 Year 5 units sold 60,000 Sales price per unit= $300/unit in the years 1-4, Year 5 $260/unit Variable costs per unit = $280/unit Annual fixed costs= $200,000 Working capital requirements: There will be an initial working-capital requirement of $100,000 just to get production started. For each year, the total investment in the net working capital will be equal to 10% of the dollar value of the sales for that year. Thus, the investment in working capital will increase during years 1-3, then decrease in year 4. Finally, all working capital is liquidated at the termination of the project at the end of year 5. The depreciation method: Use the simplified straight-line method over 5 years. Assume that the plant and equipment will have no salvage value after 5 years. A)should the company focus on cash flow or accounting profits in making its capital-budgeting decisions? Should the company be interested in incremental cash flows, incremental profits, total free cash flows, or total profits? B) How does depreciation affect free cash flows? C) How do sunk costs effect the determination of cash flows? D) What is the projects initial outlay? E) What are the differential cash flows over the projects life? F) What is the terminal cash flow? G) Draw a cash flow diagram for this project H) What is its net present value? I)What is the internal rate of return? J) Should the project be accepted? Why or why not? K) In Capital budgeting, risk can be measured from 3 perspectives. What are those 3 measures of a projects risk? L) According to the CAPM, which measurement of a projects risk is relevant? What complications does reality introduce into CAPM view of risk, and what does that mean for our view of the relevant measure of a projects risk? M) Explain how simulation works. What is the value of using the simulation approach? N) What is sensitivity analysis and what is its purpose? 3 full page answer with 2 references. Calculations done in excel.
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