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Capital Budgeting

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1. Capital Budgeting (45 pts)

A proposal to invest in new white table wine-making equipment has been developed. The following information is now provided:

1. Equipment cost (installed) is $2 million

2. Revenues of $1M, $1.2M, 1.3 and $1.4M/yr for each of the next four years.

3. Satyr consulting generated the forecasts; their fee is $250,000

4. Operating costs are 30% of sales.

5. Net working capital is expected to be 20% of the following year's sales (ie-NWC at t=0 is 20% of t=1 sales).

6. Assume that all new equipment will be depreciated straight line to zero over the period of t=1-4 (25% per year)

7. Introduction of the white table wine is expected to increase sales of "complementary products" such as olive oil, corkscrews, and wine glasses produced by the firm, resulting in additional pre-tax operating profits of $50,000 per year.

8. Project acceptance will require that $250,000 of debt be issued, resulting in interest payments of $20,000 per year over the life of the project

9. At ...

Solution Summary

Response discusses the Capital Budgeting