VARIETY ENTERPRISES CORPORATION: CAPITAL BUDGETING DECISION Ilhan Meric, Rider University Kathleen Dunne, Rider University Sherry F. Li, Rider University Gulser Meric, Rowan University CASE DESCRIPTION The capital budgeting decision is one of the most important financial decisions in business firms. In this case, Variety Enterprises Corporation (VEC) is considering whether to invest in a new production system. To determine if the project is profitable, VEC must first determine the weighted average cost of capital to finance the project. The simple payback period, discounted payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR) techniques are used to study the profitability of the project. MIRR is a relatively new capital budgeting technique, which assumes that the reinvestment rate of the project's intermediary cash flows is the firm's cost of capital. The stand-alone risk of the project is evaluated with the sensitivity analysis and scenario analysis techniques assuming that manufacturing the new product would not affect the current market risk of the company. The case gives students an opportunity to use the theoretical profitability and risk analysis techniques explained in standard finance textbooks in a real-world setting. The case is best suited for MBA and Master of Accounting students and is expected to take approximately three to four hours to complete. The case may also be appropriate for undergraduate senior finance majors. JEL: G31 KEYWORDS: Capital budgeting, weighted average cost of capital, cash flow, payback period, net present value, internal rate of return, modified internal rate of return, sensitivity analysis, scenario analysis CASE INFORMATION ariety Enterprises Corporation (VEC) is planning to invest in a special manufacturing system to produce a new product. The invoice price of the system is $280,000. It would require $5,000 in shipping expenses and $15,000 in installation costs. The system falls in MACRS 3-year class with depreciation rates of 33% for the first year, 45% for the second year and 15% for the third year. VEC plans to use the system for four years and it is expected to have a salvage value of $40,000 after four years of use. VEC expects the new system to generate sales of 1,500 units per year. The company estimates that the new product will sell for $250 per unit in the first year with a cost of $150 per unit, excluding depreciation. Management projects that both the sale price and the cost per unit will increase by 3% per year due to inflation. VEC's net operating working capital would have to increase by 15% of sales revenues to produce the new product. The firm's marginal tax rate is 40%. VEC's WACC Joan Hamilton, a recent MBA graduate of Columbia University, is conducting the capital budgeting analysis for the project. The company hired her only a few weeks ago as the head of the newly formed Capital Budgeting Analysis Department. In order to evaluate the feasibility of the investment in the new