Capital Budget Analysis
Based on the inputs below prepare a capital budget analysis for this Base Case using the Net Present Value, Internal Rate of Return and Profitability Index determining whether the project is feasible. Please show your spreadsheet calculations and your final determinations of “go” or “no go” on the project.
Project Inputs:
WACC – the cost of capital (hurdle rate) will be the current yield of the 10 Year U.S. Treasury Note as of Monday July 6, 2015, 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 summarize the project’s return prospects in relation to the capital invested.