Question

Objective: Students demonstrate ability to

1. Utilize several capital budgeting concepts.
2. Complete required calculations.
3. Develop a written recommendation to senior management based on resulting data.

Scenario: D & H Enterprises is considering building a new plant overseas or expanding their product line.
                  Cost will be $3,500 million for either option. Discount rate for both projects is 11%.

                Cash inflows for each options are below. Shown in millions:

Year	Option A: Build New	Option B: Expand Line
1	$ 1000	$ 500
2	1500	1500
3	3000	3500
4	4000	4000

Directions: Utilizing cell references and formulas, use the data in the Excel file provided to prepare

            A. Calculations – use the tabs provided for details of calculations – move final values to summary tab using cell references.

1. Payback period calculation. Textbook page 384 has example. You need to use Excel to make your calculations.

                         2. Net Present Value – work the process step-by-step then utilize the NPV formula under the
                                 Formulas, Financials, tab. *See Table 12.4 in text page 386 for example.

    Note: you will be calculating the NPV using the two methods shown on Table 12.4.
                                 Assume 11% as discount rate.

                         3. Internal Rate of Return and Modified Internal Rate of Return – utilize the IRR and MIRR
                                 formulas under the Formulas, Financial, tab in Excel. *See Table 12.5 in text page 388
                                 for example. Assume 4% as the reinvestment rate.

            B. Compose an email to senior management of D & H Enterprises (same format as Special Problem #1)…

1. Subject line states main purpose of email

2. Open email with salutation to your senior manager.

3. First sentence is recommendation to either
    Option A: build new plant in another country
    Option B: expand product line

4. Support your recommendation with facts based on your Excel calculations.
                   Refer to computations in Excel file provided as attachment.

5. Close email with summary statement and sign-off appropriate for business.
                          
Use good business writing – subject line should be short and informative, body is concise,
                                  conclusion restates primary points. See rubric for details.

Answer 1

As per rules I am answering the first 4 subparts of the question

The cash flows and cumulative CF are as below

Year	Option A: Build New	Cumulative CF	Option B: Expand Line	Cumulative CF
0	-3500	-3500	-3500	-3500
1	$1,000	($2,500)	$500	($3,000)
2	1500	($1,000)	1500	($1,500)
3	3000	$2,000	3500	$2,000
4	4000	$6,000	4000	$6,000

Accordingly the 4 answers are

	Option A		Option B
Payback	2.33		2.43
NPV	$3,446.83		$3,361.98
IRR	41.69%		39.15%
MIRR	31.75%		31.35%

WORKINGS