MTEC $4140R_{\text{w}\text{a}\text{c}\text{c}}$ 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 the breakfast "treat" venture you started last week is viable but you WILL NOT retire as a millionaire in $5$ years, you decide that you can sharpen you pencil a bit and take a better look at the opportunity and do some more rigorous analysis. As luck would have it$,$ you now know how to do this.....funny how things work out, huh?

You will manufacture your product offshore because the labor rates are significantly lower. However, getting up and running will now cost the company $$3,300,000$ for capital equipment; but the additional $$400,000$ for development expenses now drops to $$200,000($chump$-$change$).$ The equipment is expected to have a useful life of $5$ years $($again$,$ a convenient 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 $2($when the Sugar Coated Sugar Cubes cereal manufacturer goes on the offensive, adding caffeine to their product and giving away VR video games in the box$).$ The expected sales volume is year $1$ is $3,000,000$ units, year $2$ is $2,000,000,$ year $3$ is $900,000,$ year $4$ is $500,000,$ and year $5$ is $200,000.$

A few facts

Unit sell price is still the same as what you had in your previous analysis but the unit cost will change due to lower labor rates off$-$shore.

The next page is your notes and facts for the offshore manufacturing process. A typical batch size is $60,000$ units.

Corporate income tax rate is $21\%$

You need to calculate the company's cost of money $($a$.$k$.$a$.r_{\text{w}\text{a}\text{c}\text{c}})$

The debt$-$to$-$equity ratio is $4$:$3$

The risk free rate is $5\%$

The market risk premium is $10\%$

The beta for this situation is $2\mathrm{.}8$

You will finance the entire $$3,300,000$; 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 $($or yes$),$ when should you get out? Why?

What are you going to do$?$

A few expectations

Be thorough....pretend that this really is your endeavor

This is a graded assignment $($meaning you should do it$).....$this is due on Monday, July $8($giving you an extra day here because of the holiday weekend$)$

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

MTEC $4140R_{\text{w}\text{a}\text{c}\text{c}}$ Assignment

Practical Applications in Capital Budgeting

Manufacturing process $($in order, as you have observed it$)$:

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