Capital Budgeting case, spring 2016 In December of 20times1, Balloon Popper Inc.

Question

Capital Budgeting case, spring 2016 In December of 20times1, Balloon Popper Inc. was trying to decide whether to add a new line of super strong balloons to Its product line. In order to do this, It would need to buy a new silicone pouring machine (cost below). Sales for the new balloons were expected to be $2000000 per year from which sales commissions were to be paid to Balloon Poppers sales agents (see below). Direct manufacturing costs were budgeted at $600,000 for materials, and SaQOQQaiQiJabor The new equipment would (cost below) will have a disposal value of $50,000 I have posted the column you should use for your information In Blackboard in Grades, under column. Write the number you are assigned on the top of your solution. From Blackboard Gradebook, Determine If you are using column 1, 2, 3, or 4 1. ignoring taxes, what is the IRR of the project? What is the NPV of the new project? Assume the machinery will be installed on January 1 of 20times1 and be depreciated using the straight line method, (iis easiest to calculate IRR using Excel) 2. Assuming a 40% tax rate, and that according to the IRS this is a 5 year asset (MACRS rates for Yr 1.2, YR 2.32. YR 3.192, YR 4.115, Y5 5.115, YR 6.058), what is the IRR? What is the NPV? 3. To stimulate industrial development, the tax rules allow 60% of the asset cost to be deducted the first year, with the remaining f the asset cost to be deducted equally over the remaining 4 years (since it is considered to be a 5 year asset). What is the IRR, What is the NPV? 4. If Baloon Popper requires a 12 % return on all new investments, should they take on this investment? 5. What is the payback period? 6. What is the accounting rate of return? 7. Do you believe you should invest in the project? Why?

Explanation / Answer

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Year Initial cost Sales Commission Material Labor Depreciation Salvage value Cash flow PV 0         (1,250,000) (1,250,000) (1,250,000.00) 1    2,000,000          200,000    600,000    900,000            240,000         540,000         500,000.00 2    2,000,000          200,000    600,000    900,000            240,000         540,000         462,962.96 3    2,000,000          200,000    600,000    900,000            240,000         540,000         428,669.41 4    2,000,000          200,000    600,000    900,000            240,000         540,000         396,916.12 5    2,000,000          200,000    600,000    900,000            240,000                50,000         590,000         401,544.09 IRR 33% NPV         940,092.58

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