Reference no: EM133306557

Introduction to Macroeconomics and the Global Economic Environment

The case is open ending. The way you collect data may affect the results. You must collect or estimate the related data with references if you can't find them in the question. You can use either PV of CCA Tax Shield formula approach or the CCA Schedule approach in calculating CCA

1. Vita Smart Ltd is a leading high-tech company which is incorporated in Surrey, BC. The company wants to add an additional production line in Dec 2022. They hired you, a UCW graduate, to prepare a capital budgeting for the project.

Below is the information that your manager provided:

1. The facility is made up of one non residential building value at 45% of the total cost, 55% of manufacturing equipment. At the end of project's life, the equipment will be sold for an estimated $0.3 million the building will be sold for 0.8million.

2. Start-up costs include $2 million to build the production facilities, including land, building and equipment. The project will last for 6 years.

3. The company estimated that it is able to make 3000 of its new products - smart testing machine units for labs, could be sold annually over the next 6 years at a price of $1550 each. Variable costs per unit are $350 and each year's fixed costs is 50,000.

4. To handle the new product line, Vita Smart's net operating working capital would have to increase by an amount equal to 5% of sales revenues and will be fully recovered at the end of project.

5. However, if Vita introduces its new products, sales of its existing products will fall
$11,000 per year. Vita hires a marketing research company on improving the operating strategy and operating the new machine and paid them $200,000. The company also hied an engineering team to tuning the new machine. The one-time tuning cost is $185,000.
BC government also granted the company an innovation funding of $10,000 in Jan 2022

6. The manager is complaining the inflation will affect fixed cost, variable cost and the sales price in current years. The financial division has estimated the company's WACC is 12%. The company also assume the sales will increase 3% per year.

Requirements

1. Using an Excel spreadsheet:
- Find the NPV of the project by using the pro forma financial statement method to determine cash flows.
- Set up the necessary equations by referencing to the input variable cells. The spreadsheet must be formula driven; do not put any numbers in equations, must use cell references.
- Use Excel's built-in functions wherever possible

2. Assume that you are confident of your estimates of all variables that affect the project's cash flows except unit sales and sales price.

Worst Case:
If product acceptance is poor, unit sales will be only 1800 units a year and the unit price will be only
$900
Best Case:
A strong demand will produce sales of 4000 units and a unit price of $1750.
Probability:
The marketing department told you that there is a 25% chance of poor acceptance and 25% chance of excellent acceptance, and a 50% chance of average acceptance (the base case).
(a) What is the worst case NPV and the best case NPV?
(b) What is the expected NPV for this project considering all possibilities?

3. Recommendation
Use the results you obtained in the NPV and scenario analysis above to write a report (ALSO IN EXCEL) on your findings and recommend whether or not the company should proceed with the project with reasonings and references. The evaluation must be written in a professional way and at least 200 words.

4. Present this assignment in a professional way. It is your responsibility to communicate clearly to the marker.

5. Hand in by Excel Spread Sheets (One Excel File)

Attachment:- Global Economic Environment.rar