Case Study: Finance

Note: this is a mini$-$case that covers the significant details presented in this course. A full case may be provided when you take the Corporate Finance course later in your program.

Case Description

A company is intending to invest in a capital budgeting project to manufacture a medical testing device and has projected the following sales:

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

$50,00066,40081,20068,50054,500$

The installed cost of the new assets will be $$18,500,000$ which will be depreciated using the $7-$year MACRS schedule. The assets will have a salvage value of $$3,700,000.$ Initial NWC requirements are $$1,500,000$ and additional working capital needs are estimated to be $15\%$ of the projected sales increases for the following year. Total fixed costs are $$2,000,000$ per year. The medical device has a selling price of $$300$ per unit and variable production costs are $$175.$ The firm has a marginal tax rate of $35\%$ and a required rate of return of $18\%.$ Analyze this project and give your recommendation as to whether they should invest in it or abandon it$.$

Directions

Analyze this project and give your recommendation as to whether they should invest in it or abandon it