Capital Budgeting Assignment

All analysis should be done in MS Excel. A memo to your boss explaining the situation, your analysis and conclusion should be written in MS Word. You must upload both files to be graded)

Zenix Corporation has a machine that requires repairs or should be replaced. You have recently been hired by Zenix and one of your assignments is to help decide whether replacing the machine or repairing it is in the best interest of your company.

Investment required for replacing the machine is $2,500,000 and cost to repair the machine is $750,000. Repairing the machine will cut down on the number of returns from customers and therefore increase cash flows, while replacing the machine may increase the number of units sold. Zenix has evaluated and calculated additional cash flows that will be generated under the two scenarios over the next five years as follows:

Year	Cash flow (if repaired)	Cash Flow (if replaced)
1	285,500	851,300
2	280,000	855,000
3	277,800	778,100
4	191,100	669,800
5	143,700	551,000

Cost of capital for the project (repair or replacement) may vary anywhere from 10 to 14% for both scenarios. You should therefore conduct your analysis with at least five WACC points 10%, 11%, 12%, 13% and 14%. Zenix does not like to accept projects that will pay back in more than 4 years, so you must calculate Payback period to know which if any project is acceptable.

You must conduct the analysis using your knowledge of capital budgeting (NPV, IRR etc.) and time value of money to decide which of the options is better for ZENIX. All analysis must be done in Excel. Your excel model should be such that it can be used by ZENIX for other similar situations so anyone can change any numbers and use the model again. This would require all calculations to be using cell references and excel functions.

You must write a memo to your boss, explaining the situation, your analysis, and your conclusion. You must also explain the drawbacks of your technique/s if there are any.

Option A				Option B
		CALCULATION AREA				CALCULATION AREA
Year	Cash Flow	Cum CF		Year	Cash Flow
0				0
1				1
2				2
3				3
4				4
5				5
DISCOUNTED PAYBACK PERIOD CALCULATION				(Add more columns as needed)
Option A				Option B
		CALCULATION AREA				CALCULATION AREA
Year	Cash Flow	Cum CF		Year	Cash Flow
0				0
1				1
2				2
3				3
4				4
5				5