Reference no: EM132879363
Part 3: Capital Budgeting and Project Evaluation
Case Study: Assume that your group is working in Financial Department of a company that produces health care toots and equipment. Your company is considering two potential projects as follow.
Project 1: launching a new product of hearing aids. Your supplier offers you two options that have different cash outlay and generate different revenue but same useful life of 5 years. The table below shows the estimated data available to the company's Management:
Project 2: Buying a new assembly for wheelchair production. Your companies are offered two options that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option
3.1. Capital Budgeting Decision Making
You are required to write a short report to the company's Management:
1) To select a relevant method among free investment criteria of Net Present Value (NPV), Equivalent Annual Cost (EAC), profitability Index (P1). Internal Rate of Return (IRR), Sample Payback Period, and Discounted Payback Period for each project, given the market required rate of return for all project is 9.5% and the company's benchmark of payback is maximum 3 years. Your recommendation must include your justification on why you choose the specific method based on its pros and cons compared to other methods. (Note: you cannot use the same method for both projects)
Project 2: Buying a new assembly for wheelchair production. Your companies are offered two options that will generate the same revenue for the company each year. The table below shows the initial and annual costs for each option
3.1. Capital Budgeting Decision Making
You are required to write a short report to the company's Management:
1) To select a relevant method among free investment criteria of Net Present Value (NPV), Equivalent Annual Cost (EAC), profitability Index (P1). Internal Rate of Return (IRR), Sample Payback Period, and Discounted Payback Period for each project, given the market required rate of return for all project is 9.5% and the company's benchmark of payback is maximum 3 years. Your recommendation must include your justification on why you choose the specific method based on its pros and cons compared to other methods. (Note: you cannot use the same method for both projects)
2) To perform the selected method and present the outcome of your peeled evaluation and recommend the option A or 8 should the company choose for each project Your justification must include calculation steps and numerical outcomes.
3.2. Risk Analysis and Project evaluation: NPV break. even analysts Assume that for Project 2, the company finally chose Option B. It expects to sell 8,500 wheelchairs for an average price of 5750 per unit. The assembly in Option B has a residual value of 5350 000 at the end of the project The company will need to add 5 850 000 in working captal which is expected to be fully retrieved at the end of the project. Other information is available below Depreciation method: straight line Varicose cost per unit $120
Cash fixed costs per year: 535.003 of annual cost for assembly operation + $20,000 other fixed cost
Corporate marginal tax: 30% Upon the forecast of unexpected economic conditions that may be caned by the current breakout of corona virus, the company management requires your Team to prepare a risk analysts for the case where the unit price of this product decreases by 25%.
Required: perform an NPV break-even analysis to identify break-even sales of the project when the unit price decreases by 25%.
Attachment:- Finance.rar