All applicable Cases are available with McGraw-Hill's Connectn" Accounting.
Case 1:
Case study-NPV of opening a small business Jinny Buffett recently retired as a flight intendant and is interested in opening a fitness center and health spa ex¬clusively for women in Grand Cayman, where she resides. After careful study, she is somewhat puzzled as to how to proceed. In her words, "I see my business going in one of two directions: Either I open the fitness center and health spa all at once, or I start with the health spa and hold off on the fitness center for a while. Either way, It should be a success because women on this island love to be pampered. My only Concern about the fitness center is the initial cost, but if the projections look good
Required:
a. Calculate the net present value in US$ of an investment in the health spa only, assuming that the I,000-square-foot unit is purchased and then resold at the end of 10 years. (Hint: Before making your present value calculations, multiply all amounts expressed in Cl$ by $1.25 to convert into US$.)
b. Calculate the net present value in US$ of an investment in the fitness center and health spa, assuming that the 2,500-square-foot unit is purchased and then resold at the end of 10 years.
Jinny is quite concerned about possible forecasting errors and has asked you to prepare a more conservative estimate. Repeat part b, assuming that the fitness center attracts only 300 members per year (rather than 500); that the net cash inflow per month from cosmetics and skin care products is only CI$6,000 per month (rather than Cl$8,000 per month); and that commercial real estate values in Grind Cayman at the end of 10 years are only CI$200 per square foot (rather than CI$300 per square foot).
d. Explain why it might be in Jinny's best interest to lease (rather than purchase) the 1.000-square-foot unit if she initially decides to open the health spa only. Althnugh no calculations are required, you should consider both quantitative and qualitative factors in your response.
e. Vit a. is your overall recommendation? Include an explanation of any additional faciort. that you would consider in making your recommendation. Keep in mind that Jinny has not given herself a salary in her projections. Assume that a rea-sonable salary would be CI$4,000 per month.
Case 2:
Comprehensive problem-quantitative and qualitative analysis The following data have been collected by capital budgeting analysts at Sunset Beach, Inc., concerning an investment in an expansion of the company's product line. Analysts estimate that an investment of $150,000 will be required to initiate the project at the beginning of 2013. The estimated cash returns from the new product line are summarized in the following table; assume that the returns will be received in a lump sum at the end of each year:
Required:
a. Calculate the net present value of the proposed investment. Ignore income taxes and round all answers to the nearest $1.
b. Calculate the present value ratio of the investment.
c. What will the internal rate of return on this investment be relative to the cost of capital? Explain your answer.
d. Calculate the payback period of the investment.
e. Based on the quantitative analysis, would you recommend that the product line expansion project be undertaken? Explain your answer.
f. Identify some qualitative factors that you would want to have considered with respect to this project before management proceeds with the investment.
Case 3:
Capital budget expenditure analysis: Internet assignment Annual reports provide significant information about an organization's capital budget and capital budgeting process. Campbell Soup Company provides financial reports for several years at www.campbellsoup.com (Our Company --> Investor Center --> Financial Information --> Annual Reports). This exercise will require you to use Campbell's consolidated statements of cash flows, management's discussion and analysis of financial condition and results of operations, and notes to the consolidated financial statements for the most recent year presented.
Required:
Using Campbell's most recent annual report, answer the following:
a. From Campbell's consolidated statements of cash flows:
1. Identify the amount of cash used for capital expenditures from the Investing Activities section. How much cash was provided from the sale of capital assets?
2. How do these amounts compare to the previous two years? Comment on the trend relative to the general cash flow position for each year.
b. Read Campbell's discussion of the "Business," and highlight the information pro-vided about capital expenditures reported in 2011 and plans identified for 2012.
c. Read Campbell's discussion of the "Risk Factors." How may the company be adversely impacted by failure to execute acquisitions and divestitures success¬fully?
d. Read Campbell's management's discussion and analysis of financial condition and results of operations.
1. In the Liquidity and Capital Resources section, how were investing cash flows used or provided for capital expenditures?
2. In the Significant Accounting Estimates section, how are fixed assets reviewed for impairment'? What role does management judgment play?
e. From Campbell's notes to the consolidated financial statements, determine the following:
1. How does Campbell's value and depreciateproperty, plant, and equip
2. If applicable, describe Campbell's acquisitions for the year.
3. If applicable, describe Campbell's divestitures for theyear.
4. How were Campbell's capital expenditures distributed among its busl" segments?