CAPITAL BUDGETING (A Real World Simulation Cha. 24 jseilo -c- 0518 Bottle-it-Up.com manufactures plastic containers used to package a variety of liquid consumer products such as liquid soap, fabric softeners, cleaners, shampoo, etc. These containers are manufactured to customer specifications on a job order basis. During their annual budgeting were submitted for process, five requests for Capital Investment Projects totaling $1.7 million approval and funding, however the Board will only authorize $1 million in expenditures. Thus ony for Board two or three projects can be funded. Your job as Accounting Financial Analyst is to evaluate these proposals and rank them approval/funding using Average ROI, Cash Payback, and Net Present Value. Corporate Hurdle Rates are 15% minimum ROI, 5 year or less Pay Back, and a weighted Average Cost of Capital (Discount Rate) of 15% Rank the projects based on both their Profitability and qualitatively on their overall merit to the corporation. In addition to the financial data below, Jim Jarr the founder and CEO of Bottle-it-Up indicated that he would be voting for his two favorite projects "B" and "D" to help achieve the corporate goal of expanded Sales and increased Market Share. Project $280,000 S320,000 $500,000 $400,000l.mil $200,000 Initial Investment Life (in Yeats) Residual Value Annual Net Income Annual Cash Flow 0 $55,000 $105,000 $45,000 $17,000 $42,000 $18,000 $46,000 $33,000 $65,000 PROJECT "A" Process Payroll in-house: The Accounting Department requests $200,000 to buy computer equipment and payroll software to process payroll internally rather than continuing to use an outside Payroll Service Company. The projected annual increase in Net Income and Cash Flows results from cost savings from no longer contracting with an outside payroll service. PROJECT "BSell Larger Containers: Manufacturing requests $23a000 for new manufacturing equipment allowing Bottle-it-Up to expand its market by making containers as large as 10 gallons. Currently, container manufacturing size is limited to 3 gallons. PROJECT "C Make or Buy Container Labels: $320,000 is requested to develop the capability to make customized stick-on labels that are applied to container bottles. Currently all labels are subcontracted and the vendor is having quality issues and often misses delivery deadlines. PROJECT "D" Automate Manufacturing: $500,000 is requested for automated equipment that will reduce processing cycle time (receipt of order to delivery) from the current 7 days to 4 days Cost savings will result from eliminating five jobs. It also should make Bottle-it-Up more competitive and increase Sales since our major competitor offers a 5 day cycle time. PROJECT "E" -Computerize Design and Drafting: $400,000 is requested for drafting and design equipment that will allow engineers to complete special order designs more quickly. This will allow Bottle-it-Up to reduce product design cycle time by 30% from 7 days to 5 days. Present Value of an Annuity of $1 at Compound Interest (... Table B-3..) 2 4.207 4.799 5.426 4.487 5.019 4.968 344 0 5.216