Share
Explore BrainMass

The Cough Syrup Case

I need finance help. Please see the attached case study for the entire question. It asks how to solve a case involving capital budgeting decisions.

Attachments

Solution Preview

Thank you for asking BrainMass. I also included the solution in the attached Excel document.

The Cough Syrup Case

Inflation rate 3% per year
Life of plant 25 years

Initial Cost $ 65,000,000
Depreciation period for initial cost 15 years
Salvage value at the end of 15 years $ 3,000,000 (Real)
Salvage value at the end of 15 years $ 4,673,902 (Nominal)
Depreciation period for renovation cost 10 years
Renovation cost at the end of 15 years $ 10,000,000 (Real)
Renovation cost at the end of 15 years $ 15,579,674 (Nominal)
Salvage value of renovated plant at the end of 25 years $ 2,000,000 (Real)
Salvage value of renovated plant at the end of 25 years $ 4,187,556 (Nominal)

Production capacity 10,000,000 million
Price per bottle $ 3.50
Increase in price for first 5 years 5% (Real)
Increase in price for next 5 years 2% (Real)

Ingrediate cost $ 1.00 per bottle
Increase in ingredient cost 1% (Real)
Total labor cost $ 5,000,000 million
Increase in labor cost 5% (Real)
Land cost (rent) $ 1,500,000 (Real)
Tax rate 35%
Opportunity cost 10% (nominal)

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Initial cost $ -65,000,000
Renovation cost $ -15,579,674

Inflation Factor 1.000 1.030 1.061 1.093 1.126 1.159 1.194 1.230 1.267 1.305 1.344 1.384 1.426 1.469 1.513 1.558 1.605 1.653 1.702 1.754 1.806 1.860 1.916 1.974 2.033 2.094
Price per bottle (real) $ 3.68 $ 3.86 $ 4.05 $ 4.25 $ 4.47 $ 4.56 $ 4.65 $ 4.74 $ 4.84 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93 $ 4.93
Price per bottle (nominal) $ 3.79 $ 4.09 $ 4.43 $ 4.79 $ 5.18 $ 5.44 $ 5.72 $ 6.00 $ 6.31 $ 6.63 $ 6.83 $ 7.03 $ 7.24 $ 7.46 $ 7.68 $ 7.91 $ 8.15 $ 8.40 $ 8.65 $ 8.91 $ 9.17 $ ...

Solution Summary

This post builds how to solve a case involving capital budgeting decisions

$2.19