Group Project Due Wednesday, July 25h, 2018 As a financial advisor at Minor Intenational (M you have been asked to evaluate two capital nvestment atematives submitted by the producion department. Before beginning your analysis, you note that company policy has set the required rate of return for all new projects at 20% per year. You also learn that the corporate tax rate is 24%. The proposed capital project calls for the IT Depatment to develop new computer software to faciltate partial automation of a production plant. Alternative A will incur development costs of $130,000 to create the software. Ahernative B will cost $240,000 to develop the software. Software development costs are capitalized and amortized using a CCA rate of 30%. addtion, the firm believes that Net Working Capital ill rise by $5,000 at time zero and then by an additional $5,000 at the start of each year for each year that the program is operating. This applies equally to both altematives. All of the increase in Net Working Capital will be recovered at the end of the project The IT Department intends to hire an outside consultant at a cost of $10,000 to helpit choose which of the two altematives would be most effective (or it they should not invest in either of them). If nether altermative is financially attractive, the consultant will be expected to point this out to the company. The amount paid to the consultant will be expensed at the time itis ncumed To recover ts costs, the IT department intends to charge the producsion department for the use of computer time at the rate of $150 per hour for 50 hours per year. This amount will remain the same under either atemative. Mi owns all of its computer equipment, which has signficant spare capacity. The IT department plans to maintain this spare capacity into the fubure. E is company policy NOT to rent spare computer capacity to outside users because of security lfthe new atomation process is put into use, the pre-tax co?savngs each year estimated As the capital budgeting analyst, you are required to draft a comprehensive mema, addressed to the Manager, Production Department answering the following questions: 1. How should you handle the $10,000 payment to the Consultant? Why? Be specific 2. How should you handle the $150 per hour charged by the IT department? Why? Be specfic. 3. What discount rate should you use in the six steps of Capital Budgeting? 4. Calculate the NPV of each ahernative using the six steps of capital budgeting and the cost savings shown in Figure 1 above. Which altemative would you recommend? Be specific and provide an explanation for you answer ACCT 3380-Summer 2018 Robert Ironside Managerial Finance 5. The CFO is concemed that new technology might make both the software and the current production equipment obsolete after treee years I this occurs and you only obtain three years of cost savings (as per Figure 1 above), which ahemative f any). would you 6. The Engineering Department has indicated that it might be able to develop a new process to elminate this step in the manufacturing cycle. If it does this, it estimates that the salvage value of the equipment for both Altematives would be: a) End of Year 3 $40,000 b) End of Year 4:$20,000 End of Year 5: $0 Cost savings for the years the process is used will remain as shown in Figure 1 above and the impact on Net Working Capital will remain as stated up to the point that the solution? f so, when should they remove the equipment to maximize shareholder
