calucrion part only

What am I required to do in this assignment? Capital Budgeting is a process that helps in planning the investment projects of an organization in long run. It takes all possible consideration into account so that the company can evaluate the profitability of the project. It is useful for evaluating capital investment project such as purchasing equipment, the rebuilding of equipment etc. The benefit from an investment may be in form of a reduction in cost or in form of increased revenue. Importance of capital budgeting can be understood from its impact on the business, Businesses exist to earn profit except for non-profit organization. Capital budgeting is very important for any business as it impacts the growth & prosperity of the business in the long term. It creates accountability & measurability. Some of the popular techniques are net present value, internal rate of return, payback period & profitability index. In view of the above discussion read the below mentioned case carefully and answer all questions in a report format. All necessary instructions are given at the end of the case. Alpha Electronics LLC, a manufacturer of electronic fitness equipment, wishes to evaluate two alternative plans for increasing its production capacity to meet the rapidly growing demand for its key product--the Power-Mill Climber. After months of investigation and analysis, the firm has pruned the list of alternatives down to the following two plans, either of which would allow it to meet the forecast product demand. Plan A. Use current proven technology to expand the existing plant and semi-automated production line. This plan is viewed as only slightly more risky than the firm's current average level of risk. Plan B. Install new, just-developed automatic production equipment in the existing plant to replace the current semi- automated production line. Because this plan eliminates the need to expand the plant, it is less expensive than Plan A, but it is believed to be far more risky because of the unproven nature of the technology. Alpha Electronics LLC, which routinely uses NPV to evaluate capital budgeting projects, has a cost of capital of 12%. Currently the risk-free rate of interest, RF, is 9%. The firm has decided to evaluate the two plans over a 5-year time period, at the end of which each plan would be liquidated. The relevant cash flows associated with each plan are summarized in the accompanying table. Plan A Plan B Omani Rial 5,450,000 Omani Rial 4,250,000 Initial investment (CFO) Year (0) 1 2 Cash inflows (CF) Omani Rial 950,000 Omani Rial 770,000 1,230,000 1,410,000 1,910,000 1,610,000 1,940,000 1,210,000 2,900,000 2,350,000 4 The firm has determined the risk-adjusted discount rate (RADR) applicable to each plan. Plan Risk adjusted discount Rate 139 A B 15% Further analysis of the two plans has disclosed that each has a real option embedded within its cash flows. Plan A Real OptionAt the end of 3 years the firm could abandon this plan and then install the automatic equipment, which would then have a proven track record. This abandonment option is expected to add Omani Rial 200,000 of NPV and has a 25% chance of being exercised. Plan B Real Option-Because plan B does not require current expansion of the plant, it creates an improved opportunity for future plant expansion. This option allows the firm to grow its business into related areas more easily if business and economic conditions continue to improve. This expansion option is estimated to be worth Omani Rial 1,000,000 of NPV and has a 20% chance of being exercised. In view of above discussion and information, you are expected to submit a detailed report covering the following in the context of a given case: An introduction of your report which should focus on the importance of capital budgeting decisions and behavioral approaches for dealing with risk while making such decisions. Discussion on the common types of real options related to capital budgeting te abandonment, flexibility, growth and timing Discussion on the concept of annualized net present value approach for comparing unequal lived mutually exclusive projects. Discussion on the concept of strategic net present value and its importance in decision making. How strategie NPV is different than traditional NPV? Discussion on the IRR approach to capital rationing for determining the group of acceptable projects. Related to case study answer the following: a. Assuming that the two plans have the same risk as the firm, use the following capital budgeting techniques and the firm's cost of capital to evaluate their acceptability and relative ranking. Net present value (NPV) Internal rate of return (IRR). b. Recognizing the differences in plan risk, use the NPV method, the risk adjusted discount rates (RADRs), and the data given carlier to evaluate the acceptability and relative ranking of the two plans. c. Compare and contrast your finding in parts a & b. Which plan would you recommend? Did explicit recognition of the risk differences of the plans affect this recommendation? d. Use the real-options data given above for each plan to find the strategic NPV, NPV for each plan. e. Compare and contrast your findings in part d with those in part b. Did explicit recognition of the real options in cach plan affect your recommendation? f. Would your recommendations in parts a, b, and d be changed if the fimm were operating under capital rationing? Explain In your final conclusion you are required to summarize your overall findings What am I required to do in this assignment? Capital Budgeting is a process that helps in planning the investment projects of an organization in long run. It takes all possible consideration into account so that the company can evaluate the profitability of the project. It is useful for evaluating capital investment project such as purchasing equipment, the rebuilding of equipment etc. The benefit from an investment may be in form of a reduction in cost or in form of increased revenue. Importance of capital budgeting can be understood from its impact on the business, Businesses exist to earn profit except for non-profit organization. Capital budgeting is very important for any business as it impacts the growth & prosperity of the business in the long term. It creates accountability & measurability. Some of the popular techniques are net present value, internal rate of return, payback period & profitability index. In view of the above discussion read the below mentioned case carefully and answer all questions in a report format. All necessary instructions are given at the end of the case. Alpha Electronics LLC, a manufacturer of electronic fitness equipment, wishes to evaluate two alternative plans for increasing its production capacity to meet the rapidly growing demand for its key product--the Power-Mill Climber. After months of investigation and analysis, the firm has pruned the list of alternatives down to the following two plans, either of which would allow it to meet the forecast product demand. Plan A. Use current proven technology to expand the existing plant and semi-automated production line. This plan is viewed as only slightly more risky than the firm's current average level of risk. Plan B. Install new, just-developed automatic production equipment in the existing plant to replace the current semi- automated production line. Because this plan eliminates the need to expand the plant, it is less expensive than Plan A, but it is believed to be far more risky because of the unproven nature of the technology. Alpha Electronics LLC, which routinely uses NPV to evaluate capital budgeting projects, has a cost of capital of 12%. Currently the risk-free rate of interest, RF, is 9%. The firm has decided to evaluate the two plans over a 5-year time period, at the end of which each plan would be liquidated. The relevant cash flows associated with each plan are summarized in the accompanying table. Plan A Plan B Omani Rial 5,450,000 Omani Rial 4,250,000 Initial investment (CFO) Year (0) 1 2 Cash inflows (CF) Omani Rial 950,000 Omani Rial 770,000 1,230,000 1,410,000 1,910,000 1,610,000 1,940,000 1,210,000 2,900,000 2,350,000 4 The firm has determined the risk-adjusted discount rate (RADR) applicable to each plan. Plan Risk adjusted discount Rate 139 A B 15% Further analysis of the two plans has disclosed that each has a real option embedded within its cash flows. Plan A Real OptionAt the end of 3 years the firm could abandon this plan and then install the automatic equipment, which would then have a proven track record. This abandonment option is expected to add Omani Rial 200,000 of NPV and has a 25% chance of being exercised. Plan B Real Option-Because plan B does not require current expansion of the plant, it creates an improved opportunity for future plant expansion. This option allows the firm to grow its business into related areas more easily if business and economic conditions continue to improve. This expansion option is estimated to be worth Omani Rial 1,000,000 of NPV and has a 20% chance of being exercised. In view of above discussion and information, you are expected to submit a detailed report covering the following in the context of a given case: An introduction of your report which should focus on the importance of capital budgeting decisions and behavioral approaches for dealing with risk while making such decisions. Discussion on the common types of real options related to capital budgeting te abandonment, flexibility, growth and timing Discussion on the concept of annualized net present value approach for comparing unequal lived mutually exclusive projects. Discussion on the concept of strategic net present value and its importance in decision making. How strategie NPV is different than traditional NPV? Discussion on the IRR approach to capital rationing for determining the group of acceptable projects. Related to case study answer the following: a. Assuming that the two plans have the same risk as the firm, use the following capital budgeting techniques and the firm's cost of capital to evaluate their acceptability and relative ranking. Net present value (NPV) Internal rate of return (IRR). b. Recognizing the differences in plan risk, use the NPV method, the risk adjusted discount rates (RADRs), and the data given carlier to evaluate the acceptability and relative ranking of the two plans. c. Compare and contrast your finding in parts a & b. Which plan would you recommend? Did explicit recognition of the risk differences of the plans affect this recommendation? d. Use the real-options data given above for each plan to find the strategic NPV, NPV for each plan. e. Compare and contrast your findings in part d with those in part b. Did explicit recognition of the real options in cach plan affect your recommendation? f. Would your recommendations in parts a, b, and d be changed if the fimm were operating under capital rationing? Explain In your final conclusion you are required to summarize your overall findings