Capital Budgeting
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Senior management is considering two proposals to expand the product line. Expansion of the product line requires a new facility and production team. Senior management hired a consulting firm to research the potential product lines. Lava Rocks would like to make this product line for at least 5 years (so the evaluation is for 5 years of revenues and costs). You were at a meeting with the researchers and they gave you the results of the research. Download the file ACC350_p3IPs.pdf for the results of their research. Create a presentation that you will make to management. Use the following assumptions:
Assume the risk-adjusted cost of capital is 12%, compute net present value (NPV) for each proposal. Include the cash flows from salvage value and the tax benefits of depreciation (assume 5-year straight-line). Incorporate the research data and graphs and charts into your presentation for support to your recommendation.
Include in your presentation recommendations on the product line for senior management? Specify how your recommendation is affected by your assumptions for cost of capital and expected contribution margin (that is, perform a sensitivity analysis)?
Use capital budgeting to evaluate investment proposals
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Solution Summary
The solution has the capital budgeting analysis for the introduction of a Mountain Bike or a Hybrid Bike by Lava Rocks
Solution Preview
The NPV calculations are in the attached file. The file has been made in such a manner that you can change the variables in the top rows to get new values of NPV. Since the project will get over in 5 years, the salvage value and the recovery of working capital will happen at the end of year5 itself and not in year 6 ( since we are starting in year 0, the year 5 is actually ...
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