Case $2$: Koplaye Instruments Inc.

Note: Use the financial spreadsheet $($Template $6$: Project Analysis$)$ to do this calculation.

The board of directors of Koplaye Instruments Inc. is considering investing more than $$5\mathrm{.}8$ million in the construction of a new plant to produce widgets for export. Although several members of the board have reservations about the project, many feel that the company has made a wise decision.

The treasurer of the company has been able to raise funds from different sources and says that the company$$s cost of capital would be $11\%.$

The board members feel that the project is not too risky and that a $15\%$ hurdle rate would be acceptable.

The engineers of the company present the following information and estimate the life of the project to be $10$ years.

The marketing department indicates that there would be $$300,000$ invested in working capital in year $1,$ $$250,000$ in year $2,$ and $$200,000$ in year $3.$

The controller provides the details of the project$$s projected revenue and cost data.

The company$$s controller estimates that $$600,000$ of the working capital will be recovered at the end of the project. The engineers estimate that the capital assets will be sold at the end of year $10$ for $$2$ million. The company$$s income tax rate is $46\%.$

Questions

With the above information, calculate the following for the project:

Annual cash flow forecast during the $10-$year period by using the actual CCA rates. Upload your work as one PDF$,$ image, or Excel file.

Payback period $=$ years

Net present value using the cost of capital $=$ $

Net present value using the hurdle rate $=$ $

Internal rate of return $=\%$

Profitability index $=$

Financial Spreadsheets: Excel$$

The financial spreadsheets are available to download from the Excel Spreadsheets folder within this course.

Template $6($capital project analysis$)$ of the financial statement analysis section of the financial spreadsheets accompanying this text can calculate the net present value, the internal rate of return, the profitability index, and the payback period. Unlike financial calculators and other spreadsheets, this tool can calculate the annual capital cost allowance for different capital assets, which makes the project$$s cash flows more $$accurate and, ultimately, the time$-$value$-$of$-$money financial calculations more exact.

Break$-$Even Analysis Using the Contribution Margin

$012$

Volume $($units$)000$

Price per unit $0\mathrm{.}000\mathrm{.}000\mathrm{.}00$

Revenue $000$

Unit variable cost $0\mathrm{.}000\mathrm{.}000\mathrm{.}00$

Contribution margin $0\mathrm{.}000\mathrm{.}000\mathrm{.}00$

Fixed costs

Cash fixed costs $000$

Depreciation$/$amortization $000$

Total fixed costs $000$

Profit$/$loss statement

Revenue $000$

Variable costs $000$

Contribution $000$

Fixed costs $000$

Profit $($loss$)000$

Break$-$even point $($in units$)$

Regular break$-$even #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

$\%$ of sales #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

Cash break$-$even #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

$\%$ of sales #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

Profit objective

to make $($$$)000$

you need to sell $($units$)$ #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

to make $($$$)000$

you need to sell $($units$)$ #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

to make $($$$)000$

you need to sell $($units$)$ #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

Break$-$even point $($in revenue$)$

Regular break$-$even #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

Cash break$-$even #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

Profit objective

to make $000$

you need to sell #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

to make $000$

you need to sell #DIV$/0!$ #DIV$/0!$ #DIV$/0!$

to make $000$

you need to sell #DIV$/0!$ #DIV$/0!$ #DIV$/0!$