GET 2200 rwacc Assignment Practical Applications in Capital Budgeting This assignment is a continuation of last week's. This means that you will have to make a few more assumptions and provide the reasons why you made them. As always, remember is that none of this is overly difficult as long as you take it one step at a time. Good luck! Assignment After determining that you will not retire as a millionaire in 5 years during your financial analysis last week, you decide that you can sharpen you pencil a bit and take a better look at the opportunity and do some more rigorous analysis. Getting up and running will still cost the company $900,000 for capital equipment; the additional $400,000 for development expenses now drops to $250,000. The equipment is expected to have a useful life of 5 years (what a coincidence). You discover that the demand for this product will be different from what you thought originally as you now expect this to be a "fad product" and take the market by storm initially, with demand falling off sharply after year 2. The expected sales volume is year 1 is 3,200,000, year 2 is 2,800,000, year 3 is 1,800,000, year 4 is 800,000, and year 5 is 200,000. Maximize your wealth. . . A few facts Unit sell price is still the same as what you figured in your previous analysis The attached worksheet details the manufacturing process (you have decided to manufacture offshore, where labor rates are considerably less) Corporate income tax rate is 21% You need to calculate the company's cost of money The debt-to-equity ratio is 3:5 The risk free rate is 5% The Market risk premium is 10% The beta for this situation is 2.5 You will finance the entire $900,000; the financing will be at 7% and only 1 payment per year (5 total payments) for simplicity. A few questions What factors did you consider for your wealth maximization program? What assumptions did you make? Could you retire after 5 years? If no, when should you get out? Why? Are there any alternatives at the end of 5 years? A few expectations Be thorough....pretend that this really is your endeavor This is a graded assignment (not many points at stake but I want to ensure that you do it....the day it's due is the day I release EXAM 2 Please make sure your work is original If you make an assumption, back it up and make sure you stay with it throughout Enjoy the assignment....it's meant to let you be as creative as you want to be. . . . . . B D E F G H . 1 L. M N o Q TOTAL HOURS RAW COST j OVERHEAD 105% LOTS TOTAL COST OPERATOR Assembler HOURS PER LOT 2.00 2.00 1 LABOR 2 OPERATION 3 Mix Grains 4 Mix Calcium 5 Inspection 6 Mold Bar 7 Inspection Assembler QA YIELD # OF UNITS 100.0% 98.0% 85.0% 90.0% 92.0% 96.0% 100.0% LOT SIZE 5000 5000 1000 5000 1000 1000 1000 Assembler 1.00 3.00 1.00 1.00 0.50 8 Test QA Test Technician Shipping Clerk UNITS TO SHIP TOTAL YIELD Components Required 9 Ship 10 11 12 13 MATERIAL 14 100000 RAW COST OVERHEAD OVERHEAD 5% TOTAL COST Component Cost $ 0.010 $ 0.030 $ 0.065 15 Grains 16 Calcium 17 Binder (for molding) 18 19 20 Totals 21 LABOR 105% LABOR OH 22 23 24 MATERIAL 5% MATERIAL OH 25 26 27 28 29 30 TOTAL LABOR, MATERIAL, AND OVERHEAD GENERAL & ADMINISTRATIVE 9.4% 31 32 RATES 33 34 35 36 37 38 Assembler QA 3.25 $ - Test Shipping Technician Clerk $ 3.90$ 2.85 TOTAL COST UNIT COST PROFIT (ON SELL PRICE) PROFIT % (ON SELL PRICE) TOTAL REVENUE UNIT PRICE $ You will use the same unit price as last week's assignemnt. Which, just in case you forgot, is $0.70 GET 2200 rwacc Assignment Practical Applications in Capital Budgeting This assignment is a continuation of last week's. This means that you will have to make a few more assumptions and provide the reasons why you made them. As always, remember is that none of this is overly difficult as long as you take it one step at a time. Good luck! Assignment After determining that you will not retire as a millionaire in 5 years during your financial analysis last week, you decide that you can sharpen you pencil a bit and take a better look at the opportunity and do some more rigorous analysis. Getting up and running will still cost the company $900,000 for capital equipment; the additional $400,000 for development expenses now drops to $250,000. The equipment is expected to have a useful life of 5 years (what a coincidence). You discover that the demand for this product will be different from what you thought originally as you now expect this to be a "fad product" and take the market by storm initially, with demand falling off sharply after year 2. The expected sales volume is year 1 is 3,200,000, year 2 is 2,800,000, year 3 is 1,800,000, year 4 is 800,000, and year 5 is 200,000. Maximize your wealth. . . A few facts Unit sell price is still the same as what you figured in your previous analysis The attached worksheet details the manufacturing process (you have decided to manufacture offshore, where labor rates are considerably less) Corporate income tax rate is 21% You need to calculate the company's cost of money The debt-to-equity ratio is 3:5 The risk free rate is 5% The Market risk premium is 10% The beta for this situation is 2.5 You will finance the entire $900,000; the financing will be at 7% and only 1 payment per year (5 total payments) for simplicity. A few questions What factors did you consider for your wealth maximization program? What assumptions did you make? Could you retire after 5 years? If no, when should you get out? Why? Are there any alternatives at the end of 5 years? A few expectations Be thorough....pretend that this really is your endeavor This is a graded assignment (not many points at stake but I want to ensure that you do it....the day it's due is the day I release EXAM 2 Please make sure your work is original If you make an assumption, back it up and make sure you stay with it throughout Enjoy the assignment....it's meant to let you be as creative as you want to be. . . . . . B D E F G H . 1 L. M N o Q TOTAL HOURS RAW COST j OVERHEAD 105% LOTS TOTAL COST OPERATOR Assembler HOURS PER LOT 2.00 2.00 1 LABOR 2 OPERATION 3 Mix Grains 4 Mix Calcium 5 Inspection 6 Mold Bar 7 Inspection Assembler QA YIELD # OF UNITS 100.0% 98.0% 85.0% 90.0% 92.0% 96.0% 100.0% LOT SIZE 5000 5000 1000 5000 1000 1000 1000 Assembler 1.00 3.00 1.00 1.00 0.50 8 Test QA Test Technician Shipping Clerk UNITS TO SHIP TOTAL YIELD Components Required 9 Ship 10 11 12 13 MATERIAL 14 100000 RAW COST OVERHEAD OVERHEAD 5% TOTAL COST Component Cost $ 0.010 $ 0.030 $ 0.065 15 Grains 16 Calcium 17 Binder (for molding) 18 19 20 Totals 21 LABOR 105% LABOR OH 22 23 24 MATERIAL 5% MATERIAL OH 25 26 27 28 29 30 TOTAL LABOR, MATERIAL, AND OVERHEAD GENERAL & ADMINISTRATIVE 9.4% 31 32 RATES 33 34 35 36 37 38 Assembler QA 3.25 $ - Test Shipping Technician Clerk $ 3.90$ 2.85 TOTAL COST UNIT COST PROFIT (ON SELL PRICE) PROFIT % (ON SELL PRICE) TOTAL REVENUE UNIT PRICE $ You will use the same unit price as last week's assignemnt. Which, just in case you forgot, is $0.70