Based on the inputs below prepare a capital budget analysts for this Base Case u

Question

Based on the inputs below prepare a capital budget analysts for this Base Case using the Net Present Value. Internal Kale of Return. Profitability Index and Payback in Years determining: whether the project is feasible. Please show your spreadsheet calculations and your final determinations of "go" or "no go" on the project. WACC - the cost of capital (hurdle rate) will be the current yield of the 10 Year U.S. Treasury Note ax of Tuesday July 5, 2016, plus 700 basis points. Project Investment Outlay. Year 0 - $400,000 Project Investment Life - 10 years Project Depreciation - $40.000/year Project Salvage Value - $10,000 Working Capital Base of Annual Sales - 10% Expected inflation rate per year. Selling Price Per Unit - 5% Expected inflation rate per year. Manufacturing Cost per unit 3.5% Expected inflation rate per year, fixed operating costs per year 2.5% Project Tax Rate 30% Units sold per year 50.000 Selling Price per Unit, Year 1 - $35 Fixed operating costs per year excluding depreciation - $150.000 Manufacturing costs per unit. Year 1 - $25.20 Write a brief presentation explaining your conclusion of "go" or "no go" for this Capital Budget Analysis. Your presentation should include the Cost of Capital and the Return on Investment. This presentation should summaries the project's return prospects in relation to the capital invested.

Explanation / Answer

Answer :

Closing yield of 10 years US treasury note = 2.29 +700 basis points = 2.29 +0.1603 = 2.4503 = 2.45% approx.

Ideally we should go for the project as it has rendred positive present value.

Further to add that this present value is calculated after considering inflation rate.

Return on investment = 6532709 / 400000 = 16.33

Year description /units sold sale price $ sales working capital (a) manufacturing unit costs total manufacturing costs (b) fixed operating costs © depreciation (d) total expenses (b+c+d) tax savings on expenses Net cashflow discount factor Present value 0 initial outlay -400000 1 -400000 1 50000 35 1750000 175000 25.2 1260000 150000 40000 1450000 435000 560000 0.9761 546616 2 50000 36.75 1837500 183750 26.08 1304000 153750 40000 1497750 449325 605325 0.9527 576693 3 50000 38.59 1929500 192950 26.99 1349500 157594 40000 1547094 464128 653584 0.93 607833 4 50000 40.52 2026000 202600 27.94 1397000 161534 40000 1598534 479560 704426 0.9077 639407 5 50000 42.54 2127000 212700 28.92 1446000 165572 40000 1651572 495472 758200 0.886 671765 6 50000 44.67 2233500 223350 29.93 1496500 169711 40000 1706211 511863 815802 0.8648 705506 7 50000 46.9 2345000 234500 30.98 1549000 173954 40000 1762954 528886 876432 0.8441 739796 8 50000 49.25 2462500 246250 32.06 1603000 178303 40000 1821303 546391 941338 0.824 775663 9 50000 51.71 2585500 258550 33.18 1659000 182760 40000 1881760 564528 1009718 0.8043 812116 10 50000 54.3 2715000 271500 34.35 1717500 187329 40000 1944829 583449 1082120 0.785 849464 10 salvage value 10000 0.785 7850 6532709

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