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BUS 5110 - AY2020-T4

14 May - 20 May

Written Assignment Unit 6

Written Assignment Unit 6

Submission phase

Workshop timeline with 5 phasesSkip to current tasks

Setup phase

Submission phase

Current phase

Task to doSubmit your work

Task infoOpen for submissions from Thursday, 14 May 2020, 6:05 AM (5 days ago)

Task infoSubmissions deadline: Thursday, 21 May 2020, 5:55 AM (2 days left)

Assessment phase

Task infoOpen for assessment from Thursday, 21 May 2020, 6:05 AM (2 days left)

Task infoAssessment deadline: Thursday, 28 May 2020, 5:55 AM (9 days left)

Grading evaluation phase

Closed

Instructions for submission

Submit a written paper which is 3-4 pages in length (no more than 4-pages), exclusive of the reference page. Your paper should be double spaced in Times New Roman (or its equivalent) font, which is no greater than 12 points in size. The paper should cite at least three sources in APA format. One source can be your textbook.
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

$65,000 for equipment with useful life of 7 years and no salvage value.

Maintenance costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate.

Materials in Year 1 are estimated to be $15,000 but remain constant at $10,000 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 1Year 2Year 3Year 4Year 5Year 6Year 7- 75,000 100,000 125,000 150,000 150,000 150,000

Option 2

$85,000 for equipment with useful life of 7 years and a $13,000 salvage value

Maintenance costs are expected to be $3,500 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 $15,000 per year for the remaining years.

Labor is estimated to start at $60,000 in Year 1, increasing by 3% each year after.

Revenues are estimated to be:

Year 1Year 2Year 3Year 4Year 5Year 6Year 7- 80,000 95,000 130,000 140,000 150,000 160,000
The company’s required rate of return and 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 four main capital budgeting calculations be done: NPV, IRR, Payback Period, and ARR 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 considering any other factors that could impact the recommendation.

Answer 1

Solution :-

Option 1.

Year	Intial Cash outflow	Revenue	Maintenance Cost	Materials	Labour	depreciation	Net income	Cash flows (Net income +depreciation)
		A	B	C	D	E	= A -(B+C+D+E)
0	($65,000)
1		$75,000	$2,700	$15,000	$70,000	9286	($21,986)	($12,700)
2		$100,000	$2,700	$10,000	$72,100	$9,286	$5,914	$15,200
3		$125,000	$2,700	$10,000	$74,263	$9,286	$28,751	$38,037
4		$150,000	$2,700	$10,000	$76,491	$9,286	$51,523	$60,809
5		$150,000	$2,700	$10,000	$78,786	$9,286	$49,228	$58,514
6		$150,000	$2,781	$10,000	$81,150	$9,286	$46,783	$56,069
7		$150,000	$2,781	$10,000	$83,585	$9,286	$44,348	$53,634

Payback Period

Year	Cashinflows	Cummulative Cashflows
0	($65,000)	($65,000)
1	($12,700)	($77,700)
2	$15,200	($62,500)
3	$38,037	($24,463)
4	$60,809	$36,346
5	$58,514	$94,860
6	$56,069	$150,929
7	$53,634	$204,563

Payback Period = 3 years + $24,463 / $60,809

= 3.4 years

Accounting rate of return

Year	Net income
1	($21,986)
2	$5,914
3	$28,751
4	$51,523
5	$49,228
6	$46,783
7	$44,348

Total net profit = $204,561

Average Net profit = $29,223

Accounting rate of return = Average net profit / (Intial investment - scarp value)

  = $29,223 / $65,000

= 44.96%

Net present Value :

Year	Cashflows	PVF @8%	Discounted cash flows
0	($65,000)	1	($65,000)
1	($12,700)	0.9259	($11,759)
2	$15,200	0.8573	$13,031
3	$38,037	0.7938	$30,194
4	$60,809	0.735	$44,695
5	$58,514	0.6806	$39,825
6	$56,069	0.6302	$35,335
7	$53,634	0.5835	$31,295
		Total	$117,616

Net Present Value = $117,616

Option 2

Year	Intial Cash outflow	Revenue	Maintenance Cost	Materials	Labour	depreciation	Net income	Cash flows (Net income +depreciation)
		A	B	C	D	E	= A -(B+C+D+E)
0	($85,000)
1		$80,000	$3,500	$20,000	$60,000	$10,286	($13,786)	($3,500)
2		95000	$3,500	$15,000	$61,800	$10,286	$4,414	$14,700
3		$130,000	$3,500	$15,000	$63,654	$10,286	$37,560	$47,846
4		$140,000	$3,500	$15,000	$65,564	$10,286	$45,650	$55,936
5		$150,000	$3,500	$15,000	$67,531	$10,286	$53,683	$63,969
6		$160,000	$3,605	$15,000	$69,557	$10,286	$61,552	$71,838
7		$160,000	$3,605	$15,000	$71,644	$10,286	$59,465	$69,751
7		$13,000						$13,000

Payback period :

Year	Cashinflows	Cummulative Cashflows
0	($85,000)	($85,000)
1	($3,500)	($88,500)
2	$14,700	($73,800)
3	$47,846	($25,954)
4	$55,936	$29,982
5	$63,969	$93,951
6	$71,838	$165,789
7	$82,751	$248,540

Payback Period = 3 years + $25,954 / $55,936

= 3.46 years

Accounting rate of return :

Year	Net income
1	($13,786)
2	$4,414
3	$37,560
4	$45,650
5	$53,683
6	$61,552
7	$59,465

Total net profit = $248,538

Average Net profit = $35,505.43

Accounting rate of return = Average net profit / (Intial investment - scarp value)

= $35,505.43 / ($85000 - $13,000)

= 49.31%

NPV :

Year	Cashflows	PVF @8%	Discounted cash flows
0	($85,000)	1	($85,000)
1	($3,500)	0.9259	($3,241)
2	$14,700	0.8573	$12,602
3	$47,846	0.7938	$37,980
4	$55,936	0.735	$41,113
5	$63,969	0.6806	$43,537
6	$71,838	0.6302	$45,272
7	$69,751	0.5835	$40,700
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