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Presentation/PPT
27/08/2022
Question 1: Capital Budgeting Task (18 marks total)
You are helping Initech with its capital budgeting decisions. The company is a producer and wholesaler of
electronic parts, has a 14% cost of capital and is subject to a 30% tax rate. There are two major proposals on
which Initech would like your advice.
1. The device part project
Initech is considering whether it should expand into production of a part for a new generation of mobile
devices. Trends suggest these devices and their parts will offer high growth in the early years of a 5-year life
cycle.
The new plant and equipment needed to produce the part will cost $800,000, which the business will
depreciate for tax purposes using a prime cost rate of 10% per annum. When the project is wound up at the
end of five years, the general purpose equipment is expected to be sold for an estimated $200,000.
Sales in the first year are expected to be $4,000,000, increasing at a high rate of 10% in the second and third
years and then falling by 15% per year for the last two years of the project as demand declines due to
competing new technologies. Consultants called in previously by Initech, who were paid $75,000 in fees,
estimated that variable costs for the project will be 50% of its revenues.
Building rental, fixed salaries and other fixed costs directly related to the project are expected to be
$1,500,000 in the first year and increase by 2% per year thereafter. The investment in net operating working
capital related to the project is expected to be 10% of the following year’s sales revenues. This investment
will be recovered by the end of the project. It is also thought that the project will encourage additional after
tax profits of $150,000 per year for Initechs’ existing part range.
2. The conveyer system
Initech needs to install a conveyer system as soon as possible because the existing system, which has no scrap
value, is beyond repair. Three different systems are being considered. The first, System A, is the same type
of system as the old one – just a newer model. It will last 10 years and cost $40,000 to purchase and install.
The second, System B, will last 10 years and cost $55,000 to purchase and install. The third, System C, will
last 20 years and cost $130,000 to purchase and install. None of the systems will have any expected salvage
value but all will be replaced at the end of their lives. After examining all costs, the net cash outflows for
each system are: $13,000 per year for System A; $9,000 per year for System B; and $1,400 per year for
System C.
Requirements and marking criteria
Provide Initech with a memo that provides your recommendations on the two proposals. Your memo should
also include details of your analysis and briefly explain and justify your chosen methods and any assumptions
made. Table format for presenting figures is preferable.
Twelve marks will be allocated to analysis of the device part project and six marks to analysis of the conveyer
system. Marks for each will be awarded for demonstrated understanding of the issues through: justification
of chosen analytical techniques, correct application of those techniques, and appropriate and insightful
conclusions and recommendations.
I dont know how to start this question.
Is it that I have to find our the NPV first? and IRR? and PI?
And how I can calculate NPV?
I did with the execl file already, but I cant find out the NPV figures.
Please help me, give me some directions.
Thanks so much
FIN 371.01 – Spring 2017Homework 2 – Use of Leverage160 Spear Street – Q & ADUE: April 20, 2017 by 7PM (before start of class)Bring a hard copy of your HW2 “Q&A” page to…
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