A Day as Associate Consultant in your favorite Company

The Baldwin Company: A Project Analysis $($From Slides $9)(2$ points$)$

Suppose the VP of Baldwin Company is looking to evaluate a new project to produce bowling balls. Here are the relevant details:

$1.$ The cost of the marketing test is $$250,000.$

$2.$ The new product will be manufactured in a building owned by the company. If not

manufactured, the building would be sold for $$150,000.$

$3.$ The cost of the machine is $$100,000$ and is expected to be used for $5$ years, after which

it is expected to be sold for $$30,000.$

$4.$ The price of a unit of production is $$20,$ and it is expected to grow at a rate of $2\%$ per

year.

$5.$ The tax rate is $34\%,$ and the production cost is $$10$ per unit, which is expected to grow

at a rate of $10\%$ per year.

$6.$ Depreciation is calculated using the Modified Accelerated Cost Recovery System.

$7.$ Net working capital at the time of the investment is $$10,000,$ and in subsequent years, it

is expected to be $10\%$ of the total expected sales.

The marketing test concluded that the expected production levels for the next $5$ years are: E$($Quantity Demanded$)=\{5,000$; $8,000$; $12,000$; $10,000$; $6,000\}$

Questions:

A$.$ Create a capital budgeting prospect for the Baldwin investment project using an Excel file. If the opportunity cost of capital is $14\%,$ what is the NPV of the project? Should Baldwin undertake the project?

$($Note: Create a highly flexible Excel spreadsheet and utilize formulas for the calculation of cash flows.$)$

B$.$ Represent of a Y$-$X axes the NPV profile of the project. What is the maximum level of the opportunity cost of capital for the project that guarantees a positive NPV$?$

C$.$ Perform Sensitivity Analysis on this project focusing on the $4$ inputs that you consider most important for a manager to be aware of$.$ Report the results in a Table and a Tornado Chart.

D$.$ Perform Scenario Analysis on the project with uncertainty on the same inputs. Please clarify the assumptions you are making about the comovement between inputs and provide a justification for these assumptions.

E$.$ The manager is scared that a recession may arrive in the next $2$ years. Perform a NPV BEA analysis. Should be the manager by a sudden drop in the sales?