Capital Budget 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. Please show your spreadsheet calculations and your final determinations of "go" or "no go" on the project.

Project Inputs:

WACC - the cost of capital (hurdle rate) will 8.5%

Project Investment Outlay, Year 0 - $1,000,000

Project Investment Life - 5 years

Project Depreciation - $200,000 / year

Project Salvage Value - $50,000

Working Capital Base of Annual Sales - 10%

Expected inflation rate per year, Selling Price Per Unit - 2%

Expected inflation rate per year, Manufacturing Cost per unit - 1.5%

Expected inflation rate per year, Fixed operating costs per year - 1.0%

Project Tax Rate - 25%

Inputs continued:

Units sold per year - 100,000

Selling Price per Unit, Year 1 - $50

Fixed operating costs per year excluding depreciation - $200,000

Manufacturing (Variable) costs per unit, Year 1 - $42.50

Capital Budget Risk Analysis

Using your Base Case prepare the following Risk Analysis from the topics in Chapter

Scenario Analysis:

Base Case Scenario - 100,000 units sold per year - 57% probability

Worst Case Scenario - 25,000 units sold per year - 25% probability

Best Case Scenario - 125,000 units sold per year - 18% probability