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Capital Budgeting Project Instructions Below is a summary of information related to an expansion project your company is considering: The required equipment for the project
Capital Budgeting Project Instructions
Below is a summary of information related to an expansion project your company is considering:
- The required equipment for the project is expected to cost $1,200,000 including shipping and installation costs and have a useful life of 4 years, which is the estimated length of the project.
- The equipment will be depreciated using the straight-line method, meaning depreciation will be the same each year.
- Inventory is expected to increase $100,000 at the beginning of the project.
- The company estimates that it will sell 3,000,000 units in Year 1, 2,750,000 units in Year 2, 2,700,000 units in Year 3, and 2,250,000 units in Year 4. The company expects to sell the units at $2.50 each.
- The company estimates variable costs to be $1.00 each unit in Year 1, $1.25 each unit in Year 2, $1.40 each unit in Year 3, and $1.65 each unit in Year 4. Fixed costs are estimated to be $1,000,000 each year of the project.
- The estimated tax rate is expected to be 25%.
- The company is expecting to salvage the equipment for $100,000 at the end of the project.
- The company will no longer needed to increased inventory and expects to fully recover the $100,000 at the end of the project.
- The finance department estimates the weighted average cost of capital to be 10% based on the risk assessment of the project.
Analyze this potential project by first calculating the expected free cash flows for each year of the project (i.e. years 0-4) and then calculate the net present value of the project . Afterward, submit a written report that covers the following information:
- Discuss the expected free cash flows for each year of the project.
- Discuss the net present value of the project.
- Discuss whether you would recommend your company pursue this project. Why or why not? Be sure to justify your position.
- Discuss what other factors would be important to consider when evaluating capital budgeting projects.
Page Length: minimum of three pages double-spaced, not including the title page and reference page.
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