A Company has an opportunity to produce and sell a new product. Your team has been asked to use capital budgeting analysis to determine whether this would be a profitable venture for the company. New equipment would have to be acquired to produce the product. The equipment would cost $155,000 and be usable for 10 years. After 10 years, it would have a salvage value equal to 5% of the original cost. The asset will be sold at salvage value at the end of the asset's life. The discount rate for the company is 7%. See below for the forecasted net income per year from this project. Year Net Income per year Year 1 2,144 Year 2 3,531 Year 3 5,133 Year 4 6,113 Year 5 10,243 Year 6 10,500 Year 7 12,546 Year 8 12,600 Year 9 12,600 Year 10 12,600 Required: 1. Calculate the Payback period and explain the results. (note, you can only use the formula with even cash flows, research how to calculate it with uneven cashflows) 2. Calculate ARR and explain the results (use average net income for this calculation) 3. Calculate NPV and explain the results 4. Look up the prime interest rate as of today and explain how using that rate would change the NPV (would it increase it or decrease it). Deliverables: Excel workbook, professionally formatted, easy to follow, formulas are required, textbox with explanation of each result. Only the group leader you assign will submit the workbook.
A Company has an opportunity to produce and sell a new product. Your team has been asked to use capital budgeting analysis to determine whether this would be a profitable venture for the company. New equipment would have to be acquired to produce the product. The equipment would cost $155,000 and be usable for 10 years. After 10 years, it would have a salvage value equal to 5% of the original cost. The asset will be sold at salvage value at the end of the asset's life. The discount rate for the company is 7%. See below for the forecasted net income per year from this project. Year Net Income per year Year 1 2,144 Year 2 3,531 Year 3 5,133 Year 4 6,113 Year 5 10,243 Year 6 10,500 Year 7 12,546 Year 8 12,600 Year 9 12,600 Year 10 12,600 Required: 1. Calculate the Payback period and explain the results. (note, you can only use the formula with even cash flows, research how to calculate it with uneven cashflows) 2. Calculate ARR and explain the results (use average net income for this calculation) 3. Calculate NPV and explain the results 4. Look up the prime interest rate as of today and explain how using that rate would change the NPV (would it increase it or decrease it). Deliverables: Excel workbook, professionally formatted, easy to follow, formulas are required, textbox with explanation of each result. Only the group leader you assign will submit the workbook.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Transcribed Image Text:A Company has an opportunity to produce and sell a new product. Your team has been asked to use
capital budgeting analysis to determine whether this would be a profitable venture for the company.
New equipment would have to be acquired to produce the product. The equipment would cost
$155,000 and be usable for 10 years. After 10 years, it would have a salvage value equal to 5% of the
original cost. The asset will be sold at salvage value at the end of the asset's life.
The discount rate for the company is 7%.
See below for the forecasted net income per year from this project.
Year
Net Income per year
Year 1
2,144
Year 2
3,531
Year 3
5,133
Year 4
6,113
Year 5
10,243
Year 6
10,500
Year 7
12,546
Year 8
12,600
Year 9
12,600
Year 10
12,600
Required:
1. Calculate the Payback period and explain the results. (note, you can only use
the formula with even cash flows, research how to calculate it with uneven
cashflows)
2. Calculate ARR and explain the results (use average net income for this
calculation)
3. Calculate NPV and explain the results
4. Look up the prime interest rate as of today and explain how using that rate
would change the NPV (would it increase it or decrease it).
Deliverables: Excel workbook, professionally formatted, easy to follow,
formulas are required, textbox with explanation of each result. Only the group
leader you assign will submit the workbook.
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