FINC 4352 – Intermediate Finance
The goal of this project is to explore the topic of capital budgeting. The project requires you to work in Excel with the provided spreadsheet. Be sure to fill in the yellow boxes in the Excel file for full credit. In addition, type up a 1-2 page report in Word with an introduction (description of the project), findings (answer assignment questions, plots, etc.), and conclusion (summary). Make sure to follow all directions or points will be deducted. This is an individual project so be sure to submit your own work. Upon completion, please submit both your Word report and Excel file to blackboard. Questions A, B, C, D, and E are worth 12 points each. The report is worth 15 points. If you employ external references, please cite them in a bibliography section.
FuncoLand has developed an efficient, new cloud server that that it can sell to other corporations to boost online operations and stability. For FuncoLand, it would cost $10,000,000 at Year 0 to buy the equipment necessary to manufacture the server. The project would require net working capital at the beginning of each year in an amount equal to 11% of the next year’s projected sales; for example, NWC0 = 11% (Sales1). The servers would sell for $24,000 per unit, and specialists estimate that variable costs would amount to $17,500 per unit. After Year 1, the sales price and variable costs will increase at the inflation rate of 3%. The company’s nonvariable costs would be $1,000,000 (per 1,000 units) at Year 1 and would increase at the inflation rate each year thereafter. The server project would have a life of 4 years. If the project is undertaken, it must be continued for the entire 4 years. Also, the project’s returns are expected to be highly correlated with returns on the firm’s other assets. The firm believes it could sell a constant 1,000 units per year. The equipment would be depreciated over a 4-year period, using MACRS rates as shown below:
The estimated market value of the equipment at the end of the project’s 4-year life is $2,000,000. FuncoLand’s federal-plus-state tax rate is 30%. Its cost of capital is 10%.
Part 1: Cash Flow Estimation
Part 2: Capital Budgeting Analysis
Part 3: Risk Analysis
Hint: Select the Data tab, What-If Analysis, Scenario Manager. Add a scenario for each deviation. Select the Sales price cell in part A as the changing cell. Type in the value of the changing cell according to the deviation selected. Click on Summary. Select Scenario summary, highlight the NPV cell from part D in the result window, and click OK. The first row of the Result cells represents the new NPV value. For more information about Excel What if analysis: https://support.office.com/en-us/article/switch-between-various-sets-of-values-by-using-scenarios-2068afb1-ecdf-4956-9822-19ec479f55a2?ui=en-US&rs=en-US&ad=US
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