INSTRUCTIONS

• Kindly read the case exercises below in conjunction with the company's most recent annual report¹, audited financial statement and/or any other relevant source of information.

• You will be required to prepare an excel model (using MS Excel workbook).

• Submission will be electronic. Uploaded via a container on ELS

• State all relevant assumptions made.

• The case is based on a local company listed on the Jamaica Stock Exchange and as such all economic and legislative variables (e.g., taxes, inflation, risk-free rates) and assumptions must be consistent with the country. Remember to state all references.

• See 'Excel Modeling' and 'Excel Skills' on the E-learning site (also annexed to this doc) for the instructions on developing the models.

• This is an individual assignment.

Please see table below with the company's respective adjusted beta as of Thursday September 16, 2021 at 9:00 AM²

	Company			Beta
	Honey Bun (HONBUN)		0.527

1. i.e. HONBUN 2020 Annual Report
2. Retrieved from Bloomberg Terminal 16-Sept-2021

CAPITAL BUDGETING: NPV, PAYBACK, IRR & PI

Honey Bun's management is currently evaluating a new product, Honey Bulla. A test marketing program carried out in 2016 at a cost of US$150,000 showed enthusiastic acceptance for the product, which would cost more than the regular Goldie and Honey Bun but offer 25% fewer calories and had more appeal to the Heart Foundation of Jamaica. You were engaged and retained by a firm as financial analysts to analyze this project and present the findings to the company's executive committee.

Production facilities for the Honey Bulla product would be set up in an unused section of Honey Bun's Retirement Crescent plant. The machinery with an estimated cost of US$350,000 would be purchased, but shipping costs to move the machinery to Honey Bun plant would add another US$10,000, and installation charges would amount to another US$15,000. Further, Honey Bun's inventories (raw materials, work-in-process, and finished goods) would have to be increased by US$15,000 at the time of the initial investment. Twenty percent (20%) of this would be recoverable at the end of the project. If the machinery is purchased, it would have an economic life of 4 years. The machinery is expected to have a salvage value of US$0.00 after 4 years of use.

Honey Bun's management expects to sell 400,000 16-ounce cartons of the new product in each of the next 4 years. The price is expected to be US$2.00 per carton. Fixed costs are estimated to be US$100,000, and variable cash operating costs are estimated at US$1.25 per unit. Note that operating costs are a function of the number of units sold rather than unit price, so unit price changes have no direct effect on operating costs.

In examining the sales figures, a team member of yours, Adam, noted a short memo from Honey Bun's Marketing Executive, Janelle, who expressed concern that the Honey Bulla project would cut into the firm's sales of the regular Honey Buns. Specifically, the Marketing Executive estimated that regular Honey Bun sales would fall by five percent (5%) if Honey Bulla were introduced. Adam pursued this further with both the sales and production managers, and they estimated that the new project would probably lower the firm's regular Honey Bun sales by $40,000 per year. However, this volume reduction would also reduce regular Honey Bun production costs by $20,000 per year on a pretax basis.

Required:

Financial Excel Model:

1. Calculate Honey Bun's overall Weighted Average Cost of Capital (WACC)? Assume that this WACC is the appropriate discount/hurdle rate.

1. Prepare a spreadsheet showing the operating after tax cash flows, terminal cash flow and total project cash flows. Estimate the product's operating cash flows inclusive of cannibalization effects. What is the project's NPV, PI, IRR, and Payback Period? State your decisions/conclusion in the spreadsheet (bullet format, brevity is your friend!).

1. Prepare a Sensitivity Analysis of the variable(s) and/or value driver(s), you deem to be KEY to the outcome of the project (i.e., prepare the base case, then sensitivities on how the results from the base case could change if certain key variables change from the values used in the base case). Graphical illustrations of the sensitivities will enhance your submission.

Appendices:

1. Honey Bun (HONBUN) Extract from Bloomberg

| HONEY BUN 1982 L Equity . | BEIA . | Related Functions Menu Message 13 Sa HONBUN JA JMD C 9.00 +0.35 K-- /- -K --X-- 9 W4 ) On 15 Sep d Vol 12, 380 0 8.65K H 9.00K L 8.60K Val 111, 106 File HONBUN JA Equity Relative Index JMSMX Index Actions . Edit . Historical Beta Ticke Data Last Price Data Last Price Wkly Linear Beta + /- Non-Param Reg On Percent L JMI 09/16/2019 - - 09/15/2021 09/17/2018 - 09/16/2020 - Lag O Winsorize 2 Std Dev Local 6M YTD 1Y 2Y 5Y Max Weekly > > Statistics Transformations 1- M/ Legend + Track 2 Annotate O. Zoom A Select Copy Y = HONEY BUN 1982 LTD EU X = JSE MARKET INDEX 20 Y = 0.527 X . 0.695 Linear Beta Range 1 GE 15 Raw BETA 0.527 CA 10 Adjusted BETA 0.685 5 ALPHA (Intercept) 0.695 21 TT HONBUN JA Equity -Percent R 2 (Correlation 2) 0.030 CH R (Correlation) 0.173 JP Std Dev of Error 6.835 2 -10 Std Error of ALPHA 0.697 15 Std Error of BETA 0.308 10 30 -20 t-Test 1.709 Significance 0.091 Last T-Value -1.240 12 10 -8 -6 Last P-Value 0. 109 JMSMX Index-Percent Number of Points 97 Select Last Spread 408453.12 0.SH Last Ratio 0.000 Favorites 0 45M 6.0 0.4M Weekly: 09/20/19 - 09/10/21 HONBUN JA Equity 8.45 10.35M 2011 2012 2013 3014 2015 2010 2010 R Suggested Functions GP Chart securities & technical studies GF Chart a company's fundamentals LECO EC x B 9+ Lik LF 9:00 AM 9/16/2021