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UNIVERSITY OF THE PEOPLE You are logged in as Keisha Wallace (Leg out) Home My courses BUS 5111 AY2018-12 30 November 6 December /Leaning Quide Unit Learning Guide Unit 3 Discussion Assignment In the discussion forum you are expected to participate often and engage in deep levels of discourse Please post your initial response as early as possible and continue to participate throughout the unit. You are required to post an initial response to the question/issue presented in the Forum and then respond to at 3 of your classmates' initial posts. You should also respond to anyone who has responded to you. Please set-up solution model for the following capital budget problem. Explain the approach you plan to take and why. Then, please perform the calculations of your model and draw conclusions Capital Budget Problem: This case continues following the new project of the WePPROMOTE Company, that you and your partner own. WePROMOTE is in the promotional materials business. The project being considered is to manufacture a very unique case for smart phones. The case is very durable, atractive and fits virtually all models of smart phone. It will also have the logo of your client, a prominent, local to be given away at public relations events by your client company and is planned More details have emerged and your estimates are becoming more precise. The following are the new values to the data that you have been estimating up to this point · You can borrow funds from your bank at 3%. The cost to install the needed equipment will be $105,000 and this cost is incurred prior to any cash is ttps/my uopeople ade/inod/book/view.phpTid 1318145chapterid-137586 11/30/17, 4:37 AM Page 1 of 4A
Explanation / Answer
Ans:
To make the decision compute the NPV and IRR of the project cash flows. This can be done in the following steps:
First, work out the cash flows from the project by deducting the cash outflows from inflows.
Secondly, compute the NPV at the required rate of return and compute the IRR to make the conclusion.
For the given project the NPV and IRR calculation are as under:
Year
0
1
2
3
4
5
Equipment cost
105000
Gross Revenue
25000
27000
27000
27000
23000
Cash outflow
13000
12000
12000
12000
10000
Operating profit
12000
15000
15000
15000
13000
Project cash flows
-105000
12000
15000
15000
15000
13000
Discount rate
6%
NPV
($46,139.25)
IRR
-12%
Conclusion- The NPV of the project is negative which indicates that the project is not viable and would not be able to add value to the firm. Similarly, IRR is also negative which indicates that project would not able to generate returns at the required rate of return. Hence the project should be dropped.
Year
0
1
2
3
4
5
Equipment cost
105000
Gross Revenue
25000
27000
27000
27000
23000
Cash outflow
13000
12000
12000
12000
10000
Operating profit
12000
15000
15000
15000
13000
Project cash flows
-105000
12000
15000
15000
15000
13000
Discount rate
6%
NPV
($46,139.25)
IRR
-12%
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