Explore BrainMass
Share

Explore BrainMass

    Capital Budgeting

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Scenario:

    The meeting with the analyst went well. However, you want to crunch the numbers yourself to ensure accuracy. Furthermore, you need to consider the project in the broader context of how the new production facility can help the company increase output and, more importantly, profits. You know that the CFO will ask you to analyze the project at different hurdle rates, determine the implication on earnings and cash flow, and articulate why this project was chosen over the multitude of options that exists.

    Task:

    Create an Excel spreadsheet for a production plant that the company will lease for 5 years at US$1,500,000 per year; it will cost the firm US$4,000,000 in capital (straight-line depreciation, 5 year life) in year 0; it will cost the firm an additional US$150,000 per year after the new production plant is brought online for other expenses; and it will generate an incremental revenue of US$3,500,000 per year. Use a 40% tax rate, a 10% cost of capital, and a 12% re-investment rate. Assume the company will use cash flow to finance the project.

    Discuss how the project would fair under hurdle rate scenarios of 10%, 15%, and 20% (based on MIRR). Based on results do we accept or reject at each hurdle rate? 10-15-20

    Calculate NPV, MIRR

    © BrainMass Inc. brainmass.com October 9, 2019, 10:24 pm ad1c9bdddf
    https://brainmass.com/business/capital-budgeting/capital-budgeting-219353

    Attachments

    Solution Summary

    The solution explains the calculation of NPV and MIRR and making the accept/reject decision

    $2.19