Investment Opportunity: Manufacturing management wants to acquire new soap pressing equipment to support current products and anticipated future products that are in the development stage. Proposed capital investments are included in the annual budget. This includes the estimated cost of acquisition and the month the expenditure will be made. Once the request is formally submitted the approval process begins. As a member of the accounting and finance department your responsibilities include evaluation of proposed capital investments and risk assessment. The following information was included on the initial requisition: Purchase Price: Estimated purchase price for the new equipment is $150 million. The investment will be made immediately after approval. Often the purchase price does not include all ancillary expenses that are necessary for installation of the equipment and must be included in the value. Part of your responsibility is to research these additional costs and make sure they are included in the requisition. Company's Depreciation Policy: - Equipment will be depreciated using the Straight-line method. Equipment has an economic life of 5 years. - Equipment expected to have zero salvage value at the end of year 5. At that time the equipment will be obsolete and sold for scrap. Cash Inflows: Based on your analysis project inflows are expected to be $65 million per year, beginning one year after installation of the new equipment is complete. Cash Outflows: The new equipment will have extra cash outflows of $10 million per year beginning one year from today. Tax Rate: The company's estimated tax rate is 30%. Required Return: The company will only invest in projects that yield a return it feels could be earned from other investment opportunities. The required return is 17%. Project Evaluation (Total 100 points) The company follows an evaluation method called ROCE (return on capital employed) which is a two-part method: Part 1. NPV & IRR (25 points) a) Calculate the net present value (NPV) using the information above. Use the NPV tab in this spreadsheet for your calculation. Include the calculations for cash flows. b) Based on the NPV calculation is the return acceptable? Please explain your conclusion. Part 2. Risk Assessment (25 points) a) Review the "Risk Assessment" tab which includes economic data provided by the Bureau of Economic Analysis (BEA) Note: Possible economic conditions and their probabilities are as follows. Possible recession, .05, slow growth, .05, normal economic growth, .90. b) Calculate weighted return, return deviation, squared return deviation, weighted squared deviation, variance, mean and standard deviation. c) After completing the risk analysis do you still agree with your conclusion in Part 1, b.? If so why? Reassessment of NPV & IRR (25 points) a) A fixed asset suspension account, Account 99999, was established in the "General Ledger Accounts" to accumulate all expenditures relating to this project. Review of this account (See G/L for Balance) indicates actual expenditures exceeded the approved amount of $150,000,000 and the investment cost is now much b) Recalulate the NPV & IRR based on the actual expenditures (cash flow investment amount) - See "Revisit NPV & IRR" tab. Would you still accept this project? c) Given your "new" recalculated NPV & IRR, would you still accept this project? Record Acquisition of Asset (25 points) a) Prepare a journal entry to transfer the suspense account balance to the machinery and equipment account. b) Post the journal entry into the General Ledger Account(s) and establish as new balance in the affected accounts. c) Place asset into service, and assign fixed asset # 200 to the asset. Companies will now physicaly affix a fixed tag to the asset that holds the asset # 200. d) Record the information in the fixed asset management system by completing the Company's Fixed Asset Record. Tip: Date soap press is placed in service is February 1st. Include other relevant information. Do not calculate the depreciation,; but, include the book value. E19 A B 1 2 3 45 6 fx =SQRT(E18) C D E F G H J K Part 2: RISK ASSESSMENT Find the Weighted Return, Return Deviation, Squared Return Deviation, Weighted Squared Deviation, Variance, Mean and Standard Deviation. Use the cells below to show your work. 7 00 8 9 10 Economic Status (R) (P) Return Probability (R*P) R-(R*P) Weighted Return Return Deviation (R-(R*P))2 Squared Return Deviation (R-(R*P)) * P Weighted Squared Deviation 11 12 Recession -10% 0.05 13 Slow Growth 5% 0.05 -0.0050 0.0025 -0.0950 0.009025 0.000451 14 Normal Growth 17% 0.90 0.1530 0.0475 0.0170 0.002256 0.000289 0.000113 0.000260 15 16 17 18 19 Expected Value - Mean Standard deviation Variance 15.0500% 0.0008 0.028708 20 21 22 22 After completing the risk analysis do you still agree with your conclusion in Part 1, b? If so why? 24 25 NPV & IRR Risk Assessment Reassessment of NPV & IRR General Journal General Ledger Accounts Fixed Asset 23 ~~ A B D E F G H | J 1 Fixed Asset Record With Depreciation 2 Date: Asset 3 Asset Name No. Date In Service Acquisition Cost Depreciation Method Useful Life (Years) Salvage Value Depreciation Accumulated Expense Depreciation Account Account Number-40040 Number-11020 Book Value of Fixed Asset 4 Soap Press 200 2/1/2023 165,000,000 SL 5 5 6 7 8 9 10 11 12 Total 13 14 15 Abbreviation 16 SL Depreciation Method Straight-line 150% declining balance 17 150% DDB 18 200% DDB 200% declining balance 19 20 21 22 23 24 25 26 27 20 Risk Assessment Reassessment of NPV & IRR General Journal General Ledger Accounts Fixed Asset Record