CAPITAL BUDGETING CASE STUDY ANALYSIS

Project A:

This project requires an initial investment of $$2,000,000$ in equipment which will cost an additional $$130,000$ to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $$250,000.$ The project will last $6$ years at which time the market value for the equipment will be $$150,000.$

The project will project a product with a sales price of $$20\mathrm{.}00$ per unit and the variable cost per unit will be $$10\mathrm{.}00.$ The fixed costs would be $$200,000$ per year. Because this project is very close to current products sold by the business, management has expressed some favoritism towards this project and as allowed for a reduced rate of return of $2$ percentage point below its current WACC as the valuation hurdle it must meet or surpass.

$\backslash$table$[[$Years$,2014,2015,2016,2017,2018,2019],[$Forecasted Units Sold,$70,000,100,000,65,000,70,000,65,000,55,000]]$

Project B:

This project requires an initial investment of $$2,000,000$ in equipment which will cost an additional $$100,000$ to install. The firm will use the attached MACRS depreciation schedule to expense this equipment. Once the equipment is installed, the company will need to increase net working capital by $$70,000.$ The project will last $6$ years at which time the market value for the equipment will be $$50,000.$

The project will project a product with a sales price of $$40\mathrm{.}00$ per unit and the variable cost per unit will be $$15\mathrm{.}00.$ The fixed costs would be $$150,000$ per year. Because this project is not close to current products sold by the business, management wants adjust the risk profile of this analysis by imposing a $2$ percentage point increase over the firm's WACC.

$\backslash$table$[[$Years$,2014,2015,2016,2017,2018,2019],[$Forecasted Units Sold,$50,000,60,000,70,000,80,000,90,000,80,000]]$