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Hi , pls only answer Q 6 in as much detail as possible showing all calculations and steps. I have looked at a couple other
Hi pls only answer Q in as much detail as possible showing all calculations and steps. I have looked at a couple other examples, but I dont get how the calculations are done. Pls do it ASAP, thanks!!As a financial analyst at Beep Bop Electronics Inc. BBE you have been asked to evaluate two
capital investment alternatives submitted by the Manufacturing Department. Before beginning
your analysis, you note that company policy has set the minimum desired rate of return at for
all proposed projects. You also learn that the corporate tax rate is
The proposed capital project calls for the Manufacturing Department to fully automate a
production facility using one of two different advanced robotics systems. System A will incur
development costs of $ System B will cost $ to develop. Both systems will be
capitalized and amortized using a CCA rate of Assume the accelerated investment incentive
applies. In addition, the firm believes that Net Working Capital will rise by $ at time zero
and then by an additional $ at the end of each year for each year that the new system is
operating except at the end of the final year of the project This applies to both alternatives.
However, all of the increase in Net Working Capital will be recovered at the end of the project.
The Manufacturing Department intends to hire an outside CPA at a cost of $ to advise the
company on which of the two alternatives would be most effective, or if neither alternative is
financially attractive. The amount paid to the CPA will be expensed at the time it is incurred.
BCI owns all of its computer equipment, which has significant spare capacity. It is company policy
notto rent spare computer capacity to outside users due to security concerns. As such, the
company is anticipating maintaining spare computer capacity into the future. To recover a portion
of the development cost, the Manufacturing Department intends to charge BCIs Purchasing
Department for the use of computer time at the rate of $ per hour for hours per year for
each year of the project. The amount charged will remain constant regardless of the capital
investment alternative selected.
If the new automated robotics system is put into use, the pretax cost savings each year are
estimated as follows:
Table
Year System A System B
$ $
$ $
$ $
$ $
$ $
As the financial analyst, you are required to draft a comprehensive memo, addressed to:
The Manager, Manufacturing Department, answering the following questions:
How should the $ payment to the CPA be handled in the capital budgeting analysis?
Why? Be specific.
How should the $ per hour charge for computer time charged by the Manufacturing
Department to the Purchasing Department be included in the capital budgeting analysis?
Why? Be specific.
ACCT Fall Introductory Managerial Finance
Group Project continued page
What discount rate should you use in the capital budgeting analysis? Why?
Calculate the NPV of each alternative using the six steps of capital budgeting and the cost
savings shown in Table above. For Question # assume that there is no salvage value.
At this stage of the analysis, we are assuming that at the end of the equipments year life,
it will be scrapped for zero value.
In Question # the CFO is concerned that a change in technology might make the new
system obsolete after years. If this occurs and you only obtain years of cost savings as
per Table above and no salvage value, which alternative if any would you now
recommend?
In Question # the vendors of both systems have indicated that they are working on a new
generation of robotics which they expect will totally eliminate the function of the current
generation of equipment. If they are able to do this, they would be willing to repurchase
the current systems for the following amounts:
System A System B
End of Year $ $
End of Year $ $
End of Year $
Cost savings for the years the systems are in use will remain as shown in Table above and
the impact on Net Working Capital will remain as stated up to the point that the
equipment is withdrawn from service with all working capital recovered at the end of the
last year of service If the vendors do manage to develop the new generation of
equipment, should the shipping department purchase the current generation and then sell
back to the manufacturer when the new systems are released? If so what would be the
optimal year to salvage the equipment? Be specific.
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