University of La Verne
College of Business and Public Management
Bus 630 – Corporate Finance
Case Study #3 Summer 2021
Post your work to the Case #3 Blackboard file folder, due Tuesday July 27 at
Midnight, please make sure your name is in the file(s) name.
This Case work represents 15% of your total course grade.
All analysis work should be in a spreadsheet file, question answers/interpretation
may be submitted in a Word or PDF format file.
Capital Budget Risk Analysis
Based on the inputs below prepare a capital budget analysis for this Base Case
using the Net Present Value, Internal Rate of Return, Profitability Index and
Payback in Years determining whether the project is feasible. All you work should
e in a spreadsheet file.
After your analysis is completed answer these follow-up questions:
1). How does this capital budget risk analysis fit into a Balanced Scorecard
analysis?
2). Would you recommend approval of this project? Explain.
Does the risk analysis effect your decision?
Bus 635 Case 3: Hasse
2
Project Inputs:
WACC – Determine the cost of capital for your discounted cash flow.
Debt to Equity is 75%
Interest rate on the debt is 5.50%
Cu
ent Risk-Free Rate is 1.13%
Cu
ent Market Premium Rate is 8.25%
The firm’s beta is 1.30
Project Investment Outlay, Year 0 - $700,000
Project Investment Life – 7 years
Project Depreciation - $100,000 / year
Project Salvage Value - $55,000
Working Capital Base of Annual Sales – 8%
Expected inflation rate per year, Selling Price Per Unit – 2.00%
Expected inflation rate per year, Manufacturing Cost per unit – 1.50%
Expected inflation rate per year, Fixed operating costs per year – 1.50%
Project Tax Rate – 20%
Units sold per year – 40,000
Selling Price per Unit, Year 1 - $45.00
Fixed operating costs per year excluding depreciation - $75,000
Manufacturing costs per unit, Year 1 - $35.00
Bus 635 Case 3: Hasse
3
Inputs continued:
In addition to your base case analysis, please provide a scenario and sensitivity
analysis based on the following:
Worst Case Scenario = 20% decrease in sales units sold per year: 25% Probability
Base Case Scenario = 40,000 units sold per year: 55% Probability
Best Case Scenario = 20% increase in sales units sold per year: 20% Probability
Sensitive Variables:
• Selling Price Per Unit
• Manufacturing (variable) Cost Per Unit
• Weighted Average Cost of Capital
+- 10%, 20%, 30%
How does this risk analysis effect Net Present Value? Please show the calculations.
Capital Budgeting
Capital Budgeting Process
1). Asset Investment
2). Depreciable Life
3). Net Income: Revenues - Operating Expenses
4). Net Cash Flow: Depreciation / Working Capital / Disposal (Salvage Value)
5). Return Analysis: Net Present Value / Internal Rate of Return / Profitability Index / Payback
6). Risk Analysis: Scenario / Sensitivity
WACC
Weighted Average Cost of Capital Chapter 9
Debt to Assets % = 60%
Tax Rate: 30%
Interest Rate on Debt 9% Cost of
Debt AT 6.30%
Risk Free Interest Rate 2.50% Cost of
Market Rate of Return 10% Equity
CAPM 12.63%
Firm Beta 1.35
WACC: Debt % Equity % WACC
W debt 60% 6.30% 3.78%
W equity 40% 12.63% 5.05%
8.83%
&"-,Bold"&12Week 6
In Class Review
Base Analysis
Capital Budget Analysis
Text Ref: XXXXXXXXXX Average Year: 0 1 2 3 4 5 6 7 8 9 10 Total
Inputs Base Case
Equipment Cost $ 1,000,000 Investment: $ (1,000,000)
Salvage Value, Year 10 $ 50,000
Depreciation Per Year $ 100,000 Sales $ 500,000 $ 512,500 $ 525,312 $ 538,445 $ 551,906 $ 565,704 $ 579,847 $ 594,343 $ 609,201 $ 624,431 $ 5,601,691
Units Sold Every Year 25,000
Sales price per unit, Year 1 $ XXXXXXXXXX Expenses:
Annual change in sales price, after Year 1 2.5% VC $ 200,000 $ 204,000 $ 208,080 $ 212,242 $ 216,486 $ 220,816 $ 225,232 $ 229,737 $ 234,332 $ 239,019 $ 2,189,944
Variable cost per unit (VC), Year 1 $ 8.00 FC $ 50,000 $ 50,500 $ 51,005 $ 51,515 $ 52,030 $ 52,551 $ 53,076 $ 53,607 $ 54,143 $ 54,684 $ 523,111
Annual change in VC, after Year 1 2.0% Depreciation $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,000,000
Fixed Cost (FC), Year 1 $ 50,000 EBT $ 150,000 $ 158,000 $ 166,227 $ 174,689 $ 183,390 $ 192,337 $ 201,538 $ 210,999 $ 220,727 $ 230,729 $ 1,888,636
Annual change in FC, after Year 1 1.0%
Project WACC 8.83% Tax (30%) $ 45,000 $ 47,400 $ 49,868 $ 52,407 $ 55,017 $ 57,701 $ 60,461 $ 63,300 $ 66,218 $ 69,219 $ 566,591
Tax Rate 30.0% Net Income $ 105,000 $ 110,600 $ 116,359 $ 122,282 $ 128,373 $ 134,636 $ 141,077 $ 147,699 $ 154,509 $ 161,510 $ 1,322,045
Working Capital as % of next year's sales 12.0%
Salvage Value $ 35,000 $ 35,000
Risk Analysis Depreciation $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,000,000
Scenario Analysis Text Ref: XXXXXXXXXX NOWC $ (60,000) $ (1,500) $ (1,537) $ (1,576) $ (1,615) $ (1,656) $ (1,697) $ (1,740) $ (1,783) $ (1,828) $ 74,932 $ 60,000
Weak Sales = 12,500 units (25% probability) Net Cash Flow $ (1,060,000) $ 203,500 $ 209,062 $ 214,783 $ 220,667 $ 226,717 $ 232,939 $ 239,337 $ 245,916 $ 252,681 $ 371,442 $ 2,417,045
Average Sales = 25,000 units (50% probability) DCF $1,510,832
Strong Sales = 35,000 units (25% probability) NPV $450,832 Return Analysis in Dollars
IRR 17.03% Return Analysis in Percentage
Sensitivity Analysis text Ref: XXXXXXXXXX PI 1.43 Return Analysis in Ratio
Variables: Payback Years 4.94 Return Analysis in Years (Time)
XXXXXXXXXXSales Price / unit $ (856,500) $ (647,438) $ (432,654) $ (211,987) $ 14,730 $ 247,669
XXXXXXXXXXVariable Cost / unit 0.94
XXXXXXXXXXWACC
Deviations: +/- 5%, 10%, 15%
Base Analysis (2)
Capital Budget Analysis
Text Ref: XXXXXXXXXX Average Year: 0 1 2 3 4 5 6 7 8 9 10 Total
Inputs Base Case
Equipment Cost $ 1,000,000 Investment: $ (1,000,000)
Salvage Value, Year 10 $ 50,000
Depreciation Per Year $ 100,000 Sales $ 500,000 $ 512,500 $ 525,312 $ 538,445 $ 551,906 $ 565,704 $ 579,847 $ 594,343 $ 609,201 $ 624,431 $ 5,601,691
Units Sold Every Year 25,000
Sales price per unit, Year 1 $ XXXXXXXXXX Expenses:
Annual change in sales price, after Year 1 2.5% VC $ 200,000 $ 204,000 $ 208,080 $ 212,242 $ 216,486 $ 220,816 $ 225,232 $ 229,737 $ 234,332 $ 239,019 $ 2,189,944
Variable cost per unit (VC), Year 1 $ 8.00 FC $ 50,000 $ 50,500 $ 51,005 $ 51,515 $ 52,030 $ 52,551 $ 53,076 $ 53,607 $ 54,143 $ 54,684 $ 523,111
Annual change in VC, after Year 1 2.0% Depreciation $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,000,000
Fixed Cost (FC), Year 1 $ 50,000 EBT $ 150,000 $ 158,000 $ 166,227 $ 174,689 $ 183,390 $ 192,337 $ 201,538 $ 210,999 $ 220,727 $ 230,729 $ 1,888,636
Annual change in FC, after Year 1 1.0%
Project WACC 8.83% Tax (30%) $ 45,000 $ 47,400 $ 49,868 $ 52,407 $ 55,017 $ 57,701 $ 60,461 $ 63,300 $ 66,218 $ 69,219 $ 566,591
Tax Rate 30.0% Net Income $ 105,000 $ 110,600 $ 116,359 $ 122,282 $ 128,373 $ 134,636 $ 141,077 $ 147,699 $ 154,509 $ 161,510 $ 1,322,045
Working Capital as % of next year's sales 12.0%
Salvage Value $ 35,000 $ 35,000
Risk Analysis Depreciation $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000 $ 1,000,000
Scenario Analysis Text Ref: XXXXXXXXXX NOWC $ (60,000) $ (1,500) $ (1,537) $ (1,576) $ (1,615) $