You have recently assumed the role of CFO at your company. The company's CEO is looking to expand its operations by investing in new property, plant, and equipment. You are asked to do some capital budgeting analysis that will determine whether the company should invest in these new plant assets.

Utilizing the Saxton Company Income and Balance Sheet down below. Do the following:

1.Perform Ratio Analysis for the entity.Compute each ratio under the four key categories referenced in class.In addition to computing the ratios under each of the four key categories, perform DuPont Analysis as appropriate (i.e. for ROA and ROE).

2.Determine a value for the entity using Net Income as a perpetuity and ROE as a % Discount Rate.

The firm is looking to expand its operations by 10% of the firm's net property, plant, and equipment. (Calculate this amount by taking 10% of the property, plant, and equipment figure that appears on the firm's balance sheet.)

The estimated life of this new property, plant, and equipment will be 12 years. The salvage value of the equipment will be 5% of the property, plant and equipment's cost.

The annual EBIT for this new project will be 18% of the project's cost.

The company will use the straight-line method to depreciate this equipment. Also assume that there will be no increases in net working capital each year. Use 35% as the tax rate in this project.

Your calculations for the amount of property, plant, and equipment and the annual depreciation for the project

Your calculations that convert the project's EBIT to free cash flow for the 12 years of the project.

The following capital budgeting results for the project

oNet present value

oInternal rate of return

oDiscounted payback period.

Your discussion of the results that you calculated above, including a recommendation for acceptance or rejection of the project

Criteria:

Calculation of Cost of Project:Cost of Property, Plant and Equipment and annual depreciation correctly calculated.

Estimation of Cash FlowsCash flows are properly converted from accrual-based net income to cash flows from the project.

Capital Budgeting Analysis All of the NPV, IRR, and Discounted Payback period calculations are correct

SAXTON COMPANY

Income Statement

For the Year Ended December 31, 2009

Sales (all on credit) ..................................................................... $ 4,000,000

Cost of Goods Sold...........................................................................3,000,000

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Gross Profit.....................................................................................$ 1,000,000

Selling and Administrative Expenses...........................................450,000

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Operating Profit ..............................................................................$550,000

Interest Expense..............................................................................50,000

Extraordinary Loss............................................................................200,000

Earnings Before Taxes.....................................................................$300,000

Income Taxes (33%).........................................................................100,000

Net Income........................................................................................$200,000

SAXTON COMPANY

Balance Sheet

As of December 31, 2009

Assets

Cash....................................................................................... $30,000

Accounts Receivable...........................................................350,000

Marketable Securities ........................................................50,000

Inventory...............................................................................370,000

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Total Current Assets............................................................. $800,000

Net Plant and Equipment.....................................................800,000

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Total Assets............................................................................$ 1,600,000

Liabilities and Stockholders' Equity

Accounts Payable....................................................................$50,000

Notes Payable..........................................................................250,000

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Total Current Liabilities...........................................................$ 300,000

Long Term Liabilities.................................................................. 300,000

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Total Liabilities ..........................................................................$ 600,000

Common Stock............................................................................ 400,000

Retained Earnings.......................................................................600,000

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Total Stockholders' Equity.......................................................$ 1,000,000

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Total Liabilities and Stockholders' Equity.............................. $ 1,600,000