calculating capital budgeting using EAC method Part 3: Capital Budgeting and Project EvaluationCase Study: Assume that the company, where you are working as a team in Financial Department,is considering a potential project with a new product. It will require the company to buy a newequipment that will generate the same revenue for the company each year. The table below showsthe initial and annual costs for each option.3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on EquivalentAnnual Cost (EAC) to advise the Company Management which option should be chosen if therelevant discount rate is 9%?CostsOption AOption B1,500,00025,000Initial Investment1,400,000Year 135,00035,00035,000Year 225,000Year 325,000Year 435,00025,000Year 525,0003.2. Risk Analysis and Project evaluation:Assume that the company finally chose Option B. It expects to sell 600,000 units of the new productfor an average price of $15 per unit. The Equipment in Option B has a residual value of $300 000 atthe end of the project. The company will need to add $ 750 000 in working capital which is expectedto be fully retrieved at the end of the project. Other information is available below:Depreciation method: straight lineVariable cost per unit: $10.5Cash fixed costs per year: $25 000Discount rate: 9%Tax Rate: 30%Upon consideration of unexpected economic conditions, the company management requires yourTeam to prepare a risk analysis to evaluate the outcome of potential project when the values driversof the project changes by 20%.Required: identify the value drivers of the project cash flows, do a sensitivity analysis and providethe management with a sensitive analysis report which shows how net present value (NPV) wouldchange with 20% change in the value drivers.AssiguInteractive Tutorial Session Week 8 (topic 6) and Week 9 (Topic 7) for training on how to do the groupassignment with correct capital budgeting technique, proper format, structure, calculation tablesPrepaion guideline/ Important Note: Students are recommended to attendHI5002 Finance for Business Group Assignment T3 2020Page 5 of 7and terminologies. Assignments with different templates, terminologies and calculations from thesolution templates and guidance provided to you in the sessions will be investigated as potentialcontract cheater done assignments.ConclusionSummarize / Reflection the outcomes of your group's works (not more than 300 words)

We first calculate the PW of costs for both options. PW, Option A = 1,400,000 + 35,000 x P/A(9%, 4)…

3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%? Costs Option A Option B Initial Investment 1,400,000 1,500,000 25,000 25,000 Year 1 35,000 Year 2 | Year 3 Year 4 35,000 35,000 35,000 25,000 25,000 Year 5 25,000

3.1. Capital Budgeting Decision Making: Perform capital budgeting technique based on Equivalent Annual Cost (EAC) to advise the Company Management which option should be chosen if the relevant discount rate is 9%? Costs Option A Option B Initial Investment 1,400,000 1,500,000 25,000 25,000 Year 1 35,000 Year 2 | Year 3 Year 4 35,000 35,000 35,000 25,000 25,000 Year 5 25,000

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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