Please describe the circumstances of the following case study and recommend a course of action....

Question

Please describe the circumstances of the following case study and recommend a course of action. Explain your approach to the problem, perform relevant calculations and analysis, and formulate a recommendation. Ensure your work and recommendation are thoroughly supported.

Case Study:

A manufacturing company is evaluating two options for new equipment to introduce a new product to its suite of goods. The details for each option are provided below:

Option 1

$75,000 for equipment with useful life of 7 years and no salvage value.
Maintenance costs are expected to be $2,500 per year and increase by 3% in Year 6 and remain at that rate.
Materials in Year 1 are estimated to be $20,000 but remain constant at $10,000 per year for the remaining years.
Labor is estimated to start at $50,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
-	50,000	113,000	125,000	125,000	150,000	150,000

Option 2

$50,000 for equipment with useful life of 7 years and a $10,000 salvage value
Maintenance costs are expected to be $4,500 per year and increase by 3% in Year 6 and remain at that rate.
Materials in Year 1 are estimated to be $25,000 but remain constant at $20,000 per year for the remaining years.
Labor is estimated to start at $70,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7
-	75,000	100,000	125,000	155,000	200,000	150,000

The company’s required rate of returnand cost of capital is 8%.

Management has turned to its finance and accounting department to perform analyses and make a recommendation on which option to choose. They have requested that the three main capital budgeting calculations be done: NPV, IRR, and Payback Period for each option.

For this assignment, compute all required amounts and explain how the computations were performed. Evaluate the results for each option and explain what the results mean. Based on your analysis, recommend which option the company should pursue.

Superior papers will:

Perform all calculations correctly.
Articulate how the calculations were performed, including from where values used in the calculations were obtained.
Evaluate the results computed and explain the meaning of the results, including why certain measurements are more accurate than others.
Recommend which option to pursue, supported by well-thought-out rationale, and consider any other factors that could impact the recommendation.

Nitish Lath · Accepted Answer

OPTION 1
			OPTION 1
			Year	0	1	2	3	4	5	6	7
			Initial investment	75000
			Revenues			50000	113000	125000	125000	150000	150000
			Less: Costs
			Maintenance costs		2500	2500	2500	2500	2500	2575	2575
			Materials		20000	10000	10000	10000	10000	10000	10000
			Labor		50000	51500	53045	54636.35	56275.4405	57963.703715	59702.61482645
			Total costs		72500	64000	65545	67136.35	68775.4405	70538.703715	72277.61482645
			Net cash flow	-75000	-72500	-14000	47455	57863.65	56224.5595	79461.296285	77722.38517355
			Present value factor @8%	1	0.9259259259	0.8573388203	0.793832241	0.7350298528	0.680583197	0.6301696269	0.5834903953
			Present value	-75000	-67129.6296296296	-12002.743484225	37671.3089976121	42531.5101417655	38265.4904563245	50074.0954315663	45350.

Please describe the circumstances of the following case study and recommend a course of action. Explain your approach to the problem, perform relevant calculations and analysis, and formulate a...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment