Fin 12 Term Project This project is a major component of the WAC portion of this course, and a significant portion of your final grade. The paper may be completed in groups of no more than four...

Finance 12 Analysis
CAPITAL BUDGETING
Name of student:
Name of Professor:
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Table of Contents
1 Executive summary ......................................................................................................................... 3
2 Statement of problem ..................................................................................................................... 4
3 Analysis and methodology .............................................................................................................. 5
3.1 Determining Economic Break-Even Point:- ............................................................................ 5
3.2 Project’s sensitivity to residual value:- .................................................................................... 7
4 Discussion of results ...................................................................................................................... 11
4.1 Analysis of Economic Break-Even point:- ............................................................................ 11
4.2 Analysis of project’s vulnerability or sensitivity to the residual value of the project:- ......... 12
5 Conclusion ..................................................................................................................................... 13
6 References:-................................................................................................................................... 15
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1 Executive summary
In the present assignment we will analyze the financial viability of project which is
being considered by Rediform Concrete. Rediform concrete as the name suggests is in the
business of heavy goods items, concrete is a heavy solid material used in construction of
buildings, bridges, houses, factories etc. Due to the nature of industry Rediform needs huge
space and resources for running its daily operations.
Need of huge infrastructure is a prerequisite for this industry, Rediform is planning to
manufacture formed concrete products such as patio stones, mobile home stones and lawn
decorations and for this it needs additional infrastructure such as factory, machines etc. We
have been assigned the task to evaluate the financial viability of the proposed investment. The
proposed investment is equivalent to $5 Million, such huge amount of investment needs
aggressive financial analysis i.e. capital budgeting.
We have done the analysis on the basis of data available to us from internal sources,
we have used following data from the records of the company:-
 Risk free rate of return = 4%
 WACC = 10%
 Beta = 0.75
 Market rate of return = 12%
Apart from this data we have used the financial figures projected by the company in relation
to the project which consist of the average sales of $3.5 Million, salvage value of $3 Million
or $1 Million depending upon the future uncertain events. Also company has estimated that
total variable cost would be 50% of sales revenue and total fixed costs will be $500,000 per
year.
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Projects has been analyzed using various financial analysis techniques which includes several
capital budgeting techniques such as NPV, IRR etc. result of our analysis has been shown in
the conclusion part.
2 Statement of problem
Rediform Concrete is not sure whether investing in project is financial beneficial or
not. This is a typical capital budgeting problem which must be addressed in order to
determine the financial viability of the project. The total investment in the proposed project is
$5 Million which is a huge amount of money and the new factory will produce patio stones,
mobile home stoves and lawn decorations. Due to huge amount of funds involved in the
project the financial viability must be determined accurately also this project is strategically
important for the growth of the organization and therefore must be carefully analyzed.
As per the analysis and research made by other teams, project is expected to generate
sales turnover of approximately $2 million to $5 million. Apart from sales forecast, analysts
have also forecasted fixed and variable costs of the project. Total fixed costs (after tax) of the
project are estimated to $500,000 per annum whereas total variable cost (after tax) is
estimated to be 50% of the forecasted sales. Research shows that the expected life of the
proposed project will be 5 years only and at the end of the useful life of the project the
residual value of the factory cannot be determine as of now. Residual value is dependent on
freeway exit for sunshine expressway on palmetto road, if this freeway exit is constructed
than in such case the residual value of the factory would be $3 million at the end of the life of
project, but if it is not constructed by the authorities than in such case the residual value of
land will remain $1 million. This freeway is locate near the factory and is a huge factor in
determining the residual value of factory; this can be considered as the biggest factor in the
current analysis which is sufficient enough to turn the project viable or in viable.
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Thus in short we can say that the main problem is to determine if...