$(30,000) $(20,000) $(10,000) $- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32% N P V Cost of Capital NPV Profile Project A Project B Crossover...

$(30,000)
$(20,000)
$(10,000)
$-
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
8% 10% 12% 14% 16% 18% 20% 22% 24% 26% 28% 30% 32%
N
P
V

Cost of Capital
NPV Profile
Project A Project B
Crossover Rate: 15.165%
IRR Project A: 24.401%
IRR Project B: 22.743%

Elegant Memo

MEMORANDUM
TO: FINANCIAL MANAGEMENT STUDENTS
FROM: JONATHAN WILEY
SUBJECT: NEW PROJECT NPV ANALYSIS
DATE: 10/4/2020
CC: NONE
PROPOSAL
The production foreman for XYZ Corporation has proposed the following two projects for minimizing costs and generating
higher revenue:
Project 1: Retool cu
ent production equipment.
The following price quote has been identified:
Retooling costs $535,000
Set-up costs XXXXXXXXXX,000
In addition, the following incremental cash flows have been identified:
 Increased sales revenue for the first year is expected to be $177,000. Revenue will increase at
approximately 4% per year for the following four years.
 Reduced operating costs for the first year are expected to be $103,000. Cost savings will diminish by
18% a year for the project’s remaining four years.
 The retooled equipment will require $33,000 in additional maintenance costs for the first year. These
additional costs will increase by 18% a year for the remaining four years.
 The retooled equipment will require an additional $30,000 in working capital. Working capital will be
ecaptured at the end of the investment horizon.
 The expected salvage value of the retooled equipment at the end of the five-year investment horizon is
$41,000.
Project 2: Expand cu
ent production capabilities by purchasing additional equipment.
The following price quote has been identified:
Base cost $725,000
Installation costs XXXXXXXXXX,000
Modifications XXXXXXXXXX,000
In addition, the following incremental cash flows have been identified:
 Increased sales revenue for the first year is expected to be $218,000. Revenue will increase at
approximately 7% per year for the following four years.
2
 Reduced operating costs for the first year are expected to be $123,000. Cost savings will diminish by 9%
a year for the project’s remaining four years.
 The new equipment will require $41,000 in specialized maintenance costs for the first year. These
specialized costs will increase by 8% a year for the remaining four years.
 The new equipment will require an additional $43,500 in working capital. Working capital will be
ecaptured at the end of the investment horizon.
 The expected salvage value of the equipment at the end of the five-year investment horizon is $123,000.
Additional information:
 The new equipment and the retooling costs are considered 5-year property for depreciation purposes.
XYZ Corporation utilizes the appropriate MACRS depreciation method for allocating capital costs. The
applicable depreciation rates are shown below.
a. Year 1: 20%
. Year 2: 32%
c. Year 3: 19%
d. Year 4: 12%
e. Year 5: 11%
f. Year 6: 6%
 The marginal corporate tax rate for XYZ Corporation is 25%.
REQUIRED:
1. Prepare an incremental cash flow analysis worksheet for each project.
2. Compute the net present value (NPV) for each project using a cost of capital range, where the range
equals 8% through 32% (use increments of 2 percentage points).
3. Compute the internal rate of return (IRR) for each project.
4. Prepare an annotated net present value profile that clearly identifies the following:
a. The NPVs for each project.
. The IRRs for each project (within 3 decimal places after conversion to percentage format).
c. The precise (i.e., within 3 decimal places) crossover rate.
5. Prepare a memorandum using robust sentences and paragraphs, and avoid the use of bullet points.
Ensure that the memorandum addresses the following points of analysis:
a. Differences between independent and mutually exclusive projects
i. Assume that the projects are independent. Determine which project(s) should be selected for
cost of capital (ks,) figures equal to 10%, 18%, and 24%. Thoroughly explain the reasons
ehind the selections, and determine if the crossover rate and internal rates of return are
elevant to the selections.
ii. Assume that the projects are mutually exclusive. Determine which project(s) should be
selected for cost of capital (ks,) figures equal to 10%, 18%, and 24%. Thoroughly explain the
easons behind the selections, and determine if the crossover rate and internal rates of return
are relevant to the selections.
. Perform a sensitivity analysis of sales
3
i. For projects 1 and 2, increase projected sales in year one by 7% and assume that everything
else remains the same. For a cost of capital (ks,) of 12%, determine the new NPV for both
projects and the percentage changes the NPVs experienced relative to the base cases. Briefly
discuss the implications.
ii. For projects 1 and 2, decrease projected sales in year one by 7% and assume that everything
else remains the same. For a cost of capital (ks,) of 12%, determine the new NPV for both
projects and the percentage changes the NPVs experienced relative to the base cases. Briefly
discuss the implications.
iii. Present your findings in a table showing the NPVs and the percentage changes relative to the
ase case.
c. Perform a sensitivity analysis of the salvage value
i. For projects 1 and 2, increase the projected salvage value in year 5 by 7% and assume that
everything else remains the same. For a cost of capital (ks,) of 12%, determine the new NPV
for both projects and the percentage changes the NPVs experienced relative to the base cases.
Briefly discuss the implications.
ii. For projects 1 and 2, decrease the projected salvage value in year 5 by 7% and assume that
everything else remains the same. For a cost of capital (ks,) of 12%, determine the new NPV
for both projects and the percentage changes the NPVs experienced relative to the base cases.
Briefly discuss the implications.
iii. Present your findings in a table showing the NPVs and the percentage changes relative to the
ase case.
d. In light of the analysis performed on these projects, select the better project and make a specific
ecommendation. Thoroughly explain why the project chosen is a more appropriate choice than
the other project. Support the selection made with the relevant results of your calculations and
analysis.
6. Submit the following in electronic form as a single compiled PDF:
a. The extended memorandum.
. Each incremental cash flow analysis worksheet.
c. The NPV analysis with the given range of cost of capital.
d. The results of the sensitivity analysis.
e. The annotated NPV profile.
f. The Grammarly summary page showing a rating of 90% or better for your written work.
g. A signed honor code statement that guarantees that all of the work submitted for this project is
exclusively your own, including your spreadsheets, written analysis, etc.
7. Also submit electronic copies of your MS Word memo document, MS Excel spreadsheets, and full
Grammarly report to the appropriate dropboxes in D2L.
8. Spreadsheet Assignment #2 is due by Monday, October 26th, at the beginning of class.
9. Any assignments received late or after the due date will be penalized 10% per day.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
B C D E F G H I J
This is for EXAMPLE PURPOSES ONLY! Do NOT blindly copy the numbers or formulas!
Project B
XXXXXXXXXX
Retooling costs (91,000.00)$
Set-up costs (3,500.00)$
Increase in working capital (18,000.00)$
Increased sales revenue 34,000.00$ 35,360.00$ 36,774.40$ 38,245.38$ 39,775.19$
Reduced operating costs 17,000.00$ 16,320.00$ 15,667.20$ 15,040.51$ 14,438.89$
Specialized maintenance costs (7,250.00)$ (7,757.50)$ (8,300.53)$ (8,881.56)$ (9,503.27)$
Depreciation expense (18,900.00)$ (30,240.00)$ (17,955.00)$ (11,340.00)$ (10,395.00)$ (88,830.00)$
EBIT 24,850.00$ 13,682.50$ 26,186.08$ 33,064.33$ 34,315.81$ XXXXXXXXXX$
Taxes (7,455.00)$ (4,104.75)$ (7,855.82)$ (9,919.30)$ (10,294.74)$
Profit after taxes 17,395.00$ 9,577.75$ 18,330.25$ 23,145.03$ 24,021.07$
Depreciation add-back 18,900.00$ 30,240.00$ 17,955.00$ 11,340.00$ 10,395.00$
Cash Flows 36,295.00$ 39,817.75$ 36,285.25$ 34,485.03$ 34,416.07$
Recovery of working capital 18,000.00$
Salvage revenue from equipment 9,000.00$
Book value of equipment 5,670.00$
Gain (loss) on sale 3,330.00$
Taxes on sale XXXXXXXXXX)$ XXXXXXXXXXKs NPV2
Cash flow from sale 8,001.00$ XXXXXXXXXX% 50,514.55$
10.00% 41,732.32$
Total cash flows (112,500.00)$ 36,295.00$ 39,817.75$ 36,285.25$ 34,485.03$ 60