Finance mini-case analysis:
A company is intending to invest in a capital budgeting project to manufacture a medical testing device and has projected the following sales:
Year 1 Year 2 Year 3 Year 4 Year 5
50,000 66,400 81,200 68,500 54,500
The installed cost of the new assets will be $18,500,000 which will be depreciated using the 7-year MACRS schedule. The assets will have a salvage value of $3,700,000. Initial NWC requirements are $1,500,000 and additional working capital needs are estimated to be 15% of the projected sales increases for the following year. Total fixed costs are $2,000,000 per year. The medical device has a selling price of $300 per unit and variable production costs are $175. The firm has a marginal tax rate of 35% and a required rate of return of 18%. Analyze this project and give your recommendation as to whether they should invest in it or abandon it.
NOTE:
This is strictly individual work– students found to have collaborated on the analysis will be given
an F for the entire Finance section of this class
. Further administrative penalties may also be applied for having cheated on this assignment.
Rubric
5601 - Capital Budgeting Rubric5601 - Capital Budgeting Rubric
| Criteria | Ratings | Pts |
|---|
| This criterion is linked to a Learning OutcomeNPV |
| 20ptsFull Marks | 0ptsNo Marks |
| 20pts
|
| This criterion is linked to a Learning OutcomeWACC |
| 10ptsFull Marks | 0ptsNo Marks |
| 10pts
|
| This criterion is linked to a Learning OutcomeOverall Layout (Cap ex, ATSV, CNWC, & Operating Cash Flow) |
| 20ptsFull Marks | 0ptsNo Marks |
| 20pts
|
| This criterion is linked to a Learning OutcomeInvestment Decision |
| 10ptsFull Marks | 0ptsNo Marks |
| 10pts
|
| This criterion is linked to a Learning OutcomeExplanation of investment decision |
| 30ptsFull Marks | 0ptsNo Marks |
| 30pts
|
| This criterion is linked to a Learning OutcomeMACRS Depreciation Calculation |
| 10ptsFull Marks | 0ptsNo Marks |
| 10pts
|
| Total Points:100 |