Name Box Capital Budgeting Problem Crystal Lake Company is considering launching a product line extension - a "new and improved" version with enhanced product features and enviromentally friendly packaging. Below are the basic assumptions associated with the new product line extension: 7% 7 Data: 8 Project life 4 Years 9 Cost of equipment $ (1,600,000) 10 Year O Incr. in Inventory $ 50,000 11 Year 1 Incr. in AR $ 120,000 12 Year O Incr. in A/P $ 30,000 13 NWC Inreases w/ sales after initial investment 14 Sales Year 1 $ 1,500,000 Sales increase per year 15 Depreciation $ (400,000) 16 Operating costs 25% of sales 17 G&A allocation from Corporate $ (50,000) 18 Year 1 launch costs $ (75,000) 19 Prior year market research cost $ (60,000) 20 Inflation estimate per year 3% (included in sales) 21 WACC 12% 22 Taxes 21% 23 After tax cash flows cannabilized from existing product line - per year $ 50,000 24 Proceeds for salvage value of equipment at end of 4 years $ 150,000 25 26 27 Questions: 28 ) Create a cash flow framework by year and then calculato NPV, IRR, Payback, MIRR, PI 29 30 31 32 2) Should you launch the line extension? Why? 33 34 35 36 3) What is the risk associated with this project? How do you measure that risk? 37 38 39 404) What do you know for certain about your forecast? How often will project assumptions change? 41 3) What is the risk associated with this project? How do you measure that risk? 4) What do you know for certain about your forecast? How often will project assumptions change? 5) What if the sales forecast changes to 10% below the original estimate & the equipment cost is 10% higher? 6) Are EVA/ ROIC metrics appropriate in this case? 0 51 52 537) How should you handle inflation? 54 55