Capital Budgeting Case, Spring 2016 In December of 20X1, Balloon Popper Inc. was

Question

Capital Budgeting Case, Spring 2016 In December of 20X1, 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 alloon Poppers sales agents (see below). Direct manufacturing costs were budgeted at to be paid to Balloon Poppers sales agents (see below). Direct manufacturing costs were $600,000 for materials, and $900,000 for labor. 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 Sales Commissions Economic life Cost of Capital Initial Cost 5% 7% 1500000 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 20x1 and be depreciated using the straight line method. (it is easiest to calculate IRR using Excell) 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, YS 5.115, YR 6.058), what is the IRR? What is the NPV? 1. 2. 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? if Baloon Popper requires a 12 % return on all new investments, should they take on this investment? What is the payback period? What is the accounting rate of return? Do you believe you should invest in the project? Why? 4, 5. 6. 7. You will be graded 80% on accuracy and 20% on clarity of your findings. If I have to hunt for your answers, or it is not clear how you got your answers, I will take off points

Explanation / Answer

Grade- 1

IRR Formula in Excel = IRR(D38:D43,0)

3-

If Required return 12% then project should not be accepted as NPV is Negative

Sales $2,000,000.00 Less: Costs: Material cost $600,000.00 Labour Cost $900,000.00 Commission $100,000.00 Net Annual Income $400,000.00

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