Question
Jenny Hewes, a newly appointed assistant to the financial manager of the Smart Devises division of Freedom Communication, was asked to prepare a capital budgeting
Jenny Hewes, a newly appointed assistant to the financial manager of the Smart Devises division of Freedom Communication, was asked to prepare a capital budgeting report to introduce a new line of smartphones with flexible screens. The new plants and equipment constructed today is $30 million and has a five-year life. The company used straight-line depreciation and the market value of the plant and equipment are estimated to be $15 million. The division planned to sell the plants and equipment when the project is ended. There is another old production line which annual sales varies. Freedom Communication is not the only innovator among smart phone manufacturers. The market has more new entrants and Freedom Communication must adjust its strategy to survive in the competitive environment. Jenny was excited to accept the assignment. She prepared the budgeting with the information that she had but she didnt consult other divisions in the company. From Jennys report, the new line costs $46 million and promises a 37% internal rate of return. She has recommended to accept the project. Jenny was confident with the report but when she presented to the manager, it was attacked from all sides. Jenny was surprised and she needed to revise the report. Can you give Jenny some advice on how to improve a capital budgeting report? Is there any additional information that she needs to collect? (Note you may not have specific data in some analytical parts, give your comments to the report. Write your response in points and elaborate in complete sentences. Numerical examples are recommended but calculation of the revised NPV and IRR is not necessary.) It is a written response question. You dont have to write in APA format. Here is a writing sample: 1. The report doesnt include.. One of the capital budgeting rules is . Jenny needs to collect information about..For example, .is the % of, if it is added, the .will increase/decrease to . 2. ..is needed. It will affect..because.If .is added/deducted, the. may drop to. 3. Jenny needs to consult. and get data about.. because.. . From the definition of ., it is important.. Below is Jennys capital budgeting report:
Plant and equipment $(30) $15 Increased working capital (14) R&D and preliminary engineering (2) Excess capacity 0 Total investment $(46) Total salvage value $15 Sales $60 $82 $140 $157 $120 Cost of sales 26 35 60 68 52 Gross profit 34 47 80 89 68 Interest expense 5 4 4 3 3 Allocated expenses 0 0 0 0 0 Selling and administrative expenses 10 13 22 25 19 Total operating expenses 14 17 26 28 22 Operating income 20 29 54 61 46 Depreciation 3 3 3 3 3 Income before tax 17 26 51 58 43 Tax at 40% 7 11 20 23 17 Income after Tax $10 $16 $30 $35 $26 Operating Cash Flows $(46) $10 $16 $30 $35 $26 Net Present Value @15% $35 Profit Index 1.76 Internal Rate of Return 37%
Can you give Jenny some advice on how to improve a capital budgeting report? Is there any additional information that she needs to collect? (Note you may not have specific data in some analytical parts, give your comments to the report. Write your response in points and elaborate in complete sentences. Numerical examples are recommended but calculation of the revised NPV and IRR is not necessary.)
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