Case project

I have a finance Case i have all the deatils also, i have a sample file so i will show you how to it

Thanks no cheat i need a good sammury and work and Calaculation. ITS A FINANCE CASE

02 F13 BUS-F301 Case Study 2 – Description and Requirements

1/3

BUS-F301 Financial Management
Fall 2013, Class No. 14301 (Online)/ 14973 (Face-to-Face)

Case Study 2: Cashflow Estimation and Capital Budgeting (Chapters 9 & 10)

Total Points

Total Points = 160 points; Due by Sunday November 17, 11:59 p.m. (ET); Submit to
Assignments on Oncourse.

Please be reminded that in order to get the full points for the questions, you need to provide
the correct answers, with relevant working (calculation(s) and explanation(s) etc.).

Please read the Case Study – Assessment Rubric which had been posted to Modules on
Oncourse for the First Week (Week of August 26) before you work on this case study. Your
case report (including the answers to the questions and the summary of the case background)
should be well-typed using MS Office 2010 – Word and should be submitted to the
corresponding tab under Assignments on Oncourse by the deadline. All your work must be
submitted in a single MS Word file. Up to 25% of the case study possible points (i.e. 40 points)
will be deducted if you submit your work otherwise. An embedded Excel file in your MS Word
file will be considered the same as a separate Excel file submitted. So, if you embed an Excel file
in your MS Word file, the same penalty will be given. All the answers as well as the case
background summary, except the formulas, must be in your own words. Copy and paste
sentence(s)/paragraph(s) from any source, except your own source, is totally unacceptable.
Answers submitted in such a way will be subject to severe penalty.

For this case study, please study the Minicase of Chapter 10 on Page 341-342 of the textbook
(can be accessed through Courseload eTexts on Oncourse) and the answers to the questions of
the minicase (already posted to Modules on Oncourse for the Eleventh Week (Week of
November 4).

The minicase is a VERY CLOSE example for this Case Study 2. Please print the minicase from
Courseload eTexts on Oncourse and its solution from Modules on Oncourse and study them
well before you work on this case study. You can find the instructions on how to print the
textbook pages posted under Syllabus on Oncourse.

Requirements: You have to provide
(i) a brief summary (must be 350 words or more) (10 points) of the case background description

(in your own words) of this case study in the next page and
(ii) the answer (in your own words) to each attached question.

You should write up the summary before you work on the answer to any of the questions in this case
study.

For the summary, I expect you to write in your own words summarizing what are presented in the case study. I want
to make sure that you understand everything in this case study and what you are asked to do about it. Only when you
understand what are presented and what you are asked to do, then you can do well. Right?

I do not require you to mention anything about your findings (that is, your answers to the questions) in your
summary. You are not expected to add anything new (such as your opinions, explanations etc.) to your summary. I
just want to see whether you understand the case study and whether you understand the requirements or not.
Therefore, you are expected to restate or summarize in your own words (350 words or more) the background
description of this case study including what you are asked to do about it only. In your summary, you need to cover
the information contained in the paragraphs there (about Stevensons Electronics, Inc.), the information
contained in the questions and what you are asked to do by the questions. Thank you!

02 F13 BUS-F301 Case Study 2 – Description and Requirements 2/3

Stevensons Electronics, Inc. is a manufacturer of global positioning systems (GPS). Its current
model is selling excellently. However, in order to cope with the foreseeable competition with
other like electronic items, SE spent $650,000 to develop a prototype for a new GPS model that
includes both features of the existing GPS model and some new features such as enhanced
sounding, image for 3-D maps and speed for searching locations. The company had also spent a
further $80,000 to study the marketability of the new model.

SE is able to manufacture the new GPS model at a variable cost of $245 per unit. The total fixed
costs for the operation are expected to be $25 million per year. SE expects to sell 38,000,000
units, 22,000,000 units, 20,000,000 units, 15,000,000 units and 10,000,000 units of this new GPS
model per year over the next five years respectively. The new GPS model will be selling at a
price of $325 per unit. To launch this new line of production, SE needs to invest $64.5 million in
equipment which will be depreciated on a seven-year MACRS schedule. The value of the used
equipment is expected to be $2.5 million as at the end of the 5 year project life.

SE is planning to stop producing the existing GPS model entirely in three years. Should SE not
introduce the new GPS model, sales of existing GPS model will be 30,000,000 units, 15,000,000
units and 11,000,000 units for the next three years respectively. The existing GPS model can be
produced at variable costs of $115 per unit and total fixed costs of $30 million per year. The old
GPS model is selling for $280 per unit. If SE produces the new GPS model, sales of existing
GPS model will be eroded by 8,500,000 units per year. In addition, to promote sales of the
existing GPS model alongside with the new GPS model, SE has to reduce the price of the
existing GPS to $200 per unit. Net working capital for the GPS models will be 15 percent of
sales and will vary with the occurrence of the cash flows. As such, there will be no initial NWC
required. The first change in NWC is expected to occur in year 1 according to the sales of the
year. SE is currently in the tax bracket of 40 percent and it requires a 20 percent returns on all of
its projects.

Your company has just been hired by SE as a financial consultant to advise them on this new
GPS project. You are expected to provide answers to the following questions to their
management by their next meeting which is scheduled sometime next month.

1. What is/are the sunk cost(s) for this new GPS project? Briefly explain. You have to tell
what sunk cost is and the amount of the total sunk cost(s). In addition, you have to advise
SE on how to handle such cost(s). (5 points)

2. What are the cash flows of the project for each year? (95 points)
3. What is the payback period of the project? Should it be accepted if

SE requires a payback of 3 years for all projects? (10 points)
4. What is the PI (profitability index) of the project? (10 points)
5. What is the IRR (internal rate of return) of the project? (10 points)
6. What is the NPV (net present value) of the project? (10 points)
7. Should the project be accepted based on PI, IRR and NPV? Briefly explain. (10 points)

02 F13 BUS-F301 Case Study 2 – Description and Requirements 3/3

Important Reminder

“If you choose to turn in a late case study, you will lose 25% of the points for each day past‐due for
that case study. Penalty will be given immediately after the deadline. As I need to return the case
study and post the answers to the case study, no case study will be accepted for grading after 4 days
past‐due” ‐ 4‐day penalty rule. It is your responsibility to make sure that you do turn in the case study
and submit the right case study file when you turn it in. Please make sure that you check to get this done
by the deadline. You are required to save frequently at least one backup copy of the case study before
you submit it. Past‐due submission because of computer crash, misplacing of your memory stick (jump
drive) or failing to submit the correct file by the deadline will be penalized according to the above‐
mentioned 4‐day penalty rule.

F13BUS-F301 Solution to Minicase of Chapter 10

1/11

BUS-F301 Financial Management

Fall 2013, Class No. 14301 (Online)/ 14973 (Face-to-Face)

Answers to Minicase of Chapter 10 on Page 341-342 of your textbook.

Please print the minicase from Courseload on Oncourse and study it well before reading the following.
You can find the instructions on how to print the textbook pages posted under Syllabus on Oncourse.

This minicase is a VERY CLOSE example for Case Study 2. Please learn the way below on how to
present your answers to the questions in Case Study 2. You have to use your own words for your
explanations to your answers for Case Study 2.

This is an in-depth capital budgeting problem. The initial cash outlay at Year 0 (i.e. Today) is simply
the cost of the new equipment, $38,500,000. The sales each year are a combination of the sales of
the new smart phone, the lost sales each year (due to the reduction in sales units of old smart phone),
and the lost revenue (due to the reduction in selling price of old smart phone). In this case, the lost
sales are 15,000 units of the old smart phone each year for two years at a price of $310 each. The
company will also be forced to reduce the price of the old smart phone on the units they will still sell
for the next two years. So, the total change in sales is:

Net sales = New sales – Lost sales – Lost revenue

= Unit sales of new smart phone × Price of new smart phone
– Reduction in unit sales of old smart phone × Current price of old smart phone
– Reduced unit sales of old smart phone × Price reduction in old smart phone

Year 1 = 74,000 × $480 – 15,000 × $310 – (80,000 – 15,000) × ($310 – $275)
= $35,520,000 – $4,650,000 – $2,275,000
= $28,595,000

Year 2 = 95,000 × $480 – 15,000 × $310 – (60,000 – 15,000) × ($310 – $275)
= $45,600,000 – $4,650,000 – $1,575,000
= $39,375,000

Year 3 = 125,000 × $480
= $60,000,000

Year 4 = 105,000× $480
= $50,400,000

Year 5 = 80,000× $480
= $38,400,000

Variable costs
= Variable costs of new smart phone
– Reduction of variable costs of old smart phone due to lost sales
= Unit sales of new smart phone × Variable cost per unit of new smart phone
– Reduction in unit sales of old smart phone × Variable cost per unit of old smart phone

Year 1 = 74,000 × $185 – 15,000 × $125
= $13,690,000 – $1,875,000
= $11,815,000

F13 BUS-F301 Solution to Minicase of Chapter 10 2/11

Year 2 = 95,000 × $185 – 15,000 × $125
= $17,575,000 – $1,875,000
= $15,700,000

Year 3 = 125,000 × $185
= $23,125,000

Year 4 = 105,000× $185
= $19,425,000

Year 5 = 80,000× $185
= $14,800,000

Please note that as the production of old smart phone is expected to be terminated in two years, there
will not be any lost sales, lost revenue or reduction of variable costs due to the launch of the new
smart phone beyond Year 2.

Depreciation = Cost of equipment × MACRS percentage

MACRS Depreciation Allowance

Property Class
Year Three-Year Five-Year Seven-Year
1 33.33% 20.00% 14.29%
2 44.45 32.00 24.4

3 14.81 19.20 17.49
4 7.41 11.52 12.49
5 11.52 8.93
6 5.76 8.92
7 8.93
8 4.46

Since the equipment will be depreciated on a seven-year MACRS schedule, the annual depreciation
will be estimated as below.

Year 1 = $38,500,000 × 14.29% = $5,501,650
Year 2 = $38,500,000 × 24.49% = $9,428,650
Year 3 = $38,500,000 × 17.49% = $6,733,650
Year 4 = $38,500,000 × 12.49% = $4,808,650
Year 5 = $38,500,000 × 8.93% = $3,438,050

Net Working Capital (NWC)

It is estimated that net working capital for the smart phones will be 20 percent of sales. In addition,
NWC is expected to occur with the timing of the cash flows for the year. Moreover, there is no initial
outlay for NWC. However, changes in NWC will initially occur in Year 1 with the sales of the first
year.

Thus, net working capital as at the end of the years can be estimated as below.

NWC = 20% × Net sales of the year = .2 × Net sales of the year

F13 BUS-F301 Solution to Minicase of Chapter 10 3/11

Year 0 = $0 (because of no initial outlay)

Year 1 = .2 × $28,595,000 = $5,719,000

Year 2 = .2 × $39,375,000 = $7,875,000

Year 3 = .2 × $60,000,000 = $12,000,000

Year 4 =.2 × $50,400,000 =$10,080,000

Year 5 = $0 (no need to carry NWC anymore at the end of the project,
in fact, it is the time to recover the NWC)

Please note that the beginning balance of a year is equal to the ending balance of the previous year.

Cash flow estimation

Sales Year 1 Year 2 Year 3 Year 4 Year 5

New sales $35,520,000 $45,600,000 $60,000,000 $50,400,000 $38,400,000
– Lost sales 4,650,000 4,650,000
– Lost revenue 2,275,000 1,575,000

=Net sales $28,595,000 $39,375,000 $60,000,000 $50,400,000 $38,400,000

VC
New $13,690,000 $17,575,000 $23,125,000 $19,425,000 $14,800,000
–Lost sales 1,875,000 1,875,000

=VC $11,815,000 $15,700,000 $23,125,000 $19,425,000 $14,800,000

Sales $28,595,000 $39,375,000 $60,000,000 $50,400,000 $38,400,000
–VC 11,815,000 15,700,000 23,125,000 19,425,000 14,800,000
– Fixed costs 5,300,000 5,300,000 5,300,000 5,300,000 5,300,000
–Depreciation 5,501,650 9,428,650 6,733,650 4,808,650 3,438,050

=EBT $5,978,350 $8,946,350 $24,841,350 $20,866,350 $14,861,950
–Tax (35%) 2,092,423 3,131,223 8,694,473 7,303,223 5,201,683

=NI $3,885,928 $5,815,128 $16,146,878 $13,563,128 $9,660,268
+ Depreciation 5,501,650 9,428,650 6,733,650 4,808,650 3,438,050

=OCF $9,387,578 $15,243,778 $22,880,528 $18,371,778 $13,098,318

NWC
Beg NWC $0 $5,719,000 $7,875,000 $12,000,000 $10,080,000
–End NWC 5,719,000 7,875,000 12,000,000 10,080,000 0

=NWC CF ($5,719,000) ($2,156,000) ($4,125,000) $1,920,000 $10,080,000

Net CF $3,668,578 $13,087,778 $18,755,528 $20,291,778 $23,178,318

Please note that here Net CF (Net cash flow) = OCF (Operating cash flow) + NWC CF (Net working
capital cash flow).

F13 BUS-F301 Solution to Minicase of Chapter 10 4/11

Book Value (BV) of equipment
= Cost of equipment – Accumulated depreciation over the project’s five year life
= $38,500,000 – ($5,501,650+$9,428,650+$6,733,650+$4,808,650+$3,438,050)
= $38,500,000 – $29,910,650

= $8,589,350

Since, at the end of the project life, the book value of the equipment ($8,589,350) is higher than its
estimated market value ($5,400,000), we need to calculate the tax credit that can be realized on the
sale of the equipment.

Tax credit on sale of equipment = (BV – MV)(TC)
where BV is the book value of the equipment at the end of the project life
MV is the estimated market value of the equipment at the end of the project life
TC is the corporate tax rate

Tax credit on sale of equipment

= (BV – MV)(TC)
= ($8,589,350– $5,400,000)(.35)
= $1,116,273

CF on sale of equipment
= Estimated market value of equipment + Tax credit on sale of equipment
= $5,400,000 + $1,116,273
= $6,516,273

So, the cash flows of the project are:

Time Cash flow
0 –$38,500,000
1 3,668,578
2 13,087,778
3 18,755,528
4 20,291,778
5 29,694,591 (=$23,178,318 +$6,516,273)

1. The payback period is:

Year Cash flow Cum. cash flow
0 –$38,500,000 –$38,500,000
1 3,668,578 – 34,831,422 (=–38,500,000+ 3,668,578)
2 13,087,778 – 21,743,644 (=–34,831,422 + 13,087,778)
3 18,755,528 –2,988,116 (=–21,743,644 + 18,755,528)
4 20,291,778 17,303,662 (=–2,988,116 + 20,291,778)
5 29,694,591 46,998,253 (=17,303,662 + 29,694,591)

Note: For answer similar to this in Case Study 2, your are required to show how you calculate
the cumulative cash flows as above. Otherwise, your working will be considered as incomplete.

Full recovery takes place in Year 4 when the cumulative cash flow turns from
negative to positive.

F13 BUS-F301 Solution to Minicase of Chapter 10 5/11

Payback
= Number of years before full recovery
+ Unrecovered cash flow at the start of the full recovery year/
Cash flow generated during the full recovery year

years15.3

147257.3

8$20,291,77
3Payback

116,988,2$





2. The profitability index is:

By formula:

5
5

4
4

3
3

2
2

1
1

)r1()r1()r1()r1()r1(

CFCFCFCFCF














10.127,804,56$

)12.1(

591,694,29$

)12.1(

778,291,20$

)12.1(

528,755,18$

)12.1(

778,087,13$

)12.1(

578,668,3$

%)121(

591,694,29$
%)121(
778,291,20$
%)121(
528,755,18$
%)121(
778,087,13$
%)121(

578,668,3$
PV

54321

54321
























48.1

475432.1

000,500,38$

10.127,804,56$
PI





Cost

Note: For answer similar to this in Case Study 2, if you use the formula method for your
calculations, you are required to show what numbers you put in the formula in the same way as
the above. Otherwise, your working will be considered as incomplete.

F13 BUS-F301 Solution to Minicase of Chapter 10 6/11

By financial Calculator:

The PV in this question can also be calculated using a financial calculator.

Enter CF0 $0
C01 $3,668,578
F01 1
C02 $13,087,778
F02 1
C03 $18,755,528
F03 1
C04 $20,291,778
F04 1
C05 $ 29,694,591
F05 1
I 12

CPT NPV = $56,804,127.10

Please note that we calculate PV instead of NPV this time. We have to set CF0 = 0.

Suggested keystrokes with Texas Instruments BA II PLUS:

Press CF 2nd [CLR WORK] to clear the work sheet.
After that, apply the following keystrokes.
0 ENTER Down Arrow 3668578 ENTER Down Arrow Down Arrow 13087778

ENTER Down Arrow Down Arrow 18755528 ENTER Down Arrow Down Arrow
20291778 ENTER Down Arrow Down Arrow 29694591 ENTER NPV 12 ENTER
Down Arrow CPT

 Output = 56,804,126.10

48.1
475432.1
000,500,38$
10.127,804,56$
PI



Cost
PV

Note: For answer similar to this in Case Study 2, if you use a financial calculator for your
calculations, you are required to include the cash flows you entered and the keystrokes as in the
above. Otherwise, your working will be considered as incomplete.

F13 BUS-F301 Solution to Minicase of Chapter 10 7/11

By Excel:

A B C
1 Year Cash Flow

2 0
– $38,500,000 CF0 shows the cost of the project is

$38,500,000

3 1
3,668,578 To calculate PV, we use the function

NPV(rate, value1, [value 2]..)

4 2 13,087,778
5 3 18,755,528
6 4 20,291,778
7 5 29,694,591
8

At required rate of
return (discount

rate) = 12%

11 PV = $56,804,127.10
Formula in Cell B11 is
=NPV(B9, B3:B7)

12
13 PI = PV/Cost = 1.475432 Formula in Cell B13 is =B11/-B2

Note: For answer similar to this in Case Study 2, if you use Excel for your calculations, you are
required to present your answer in the way as shown above. That is, you need to include the
column heading and the row number as well as the Excel formulas, in addition to the cash flows
and required return return. Otherwise, your working will be considered as incomplete.

3. The project IRR is:

54321

)1(

591,694,29$
)1(
778,291,20$
)1(
528,755,18$
)1(
778,087,13$
)1(

578,668,3$
000,500,38$0

IRRIRRIRRIRRIRR 












Solve for IRR = 25.44% by trial and error.

The new smart phone project has an IRR of 25.44 percent.

It is very difficult to solve for IRR without using a financial calculator or Excel. You
have to substitute different values of IRR on the right hand side and calculate until you
get the value equals the value on the left hand side (i.e. 0). We call this “trial and error”
method.

F13 BUS-F301 Solution to Minicase of Chapter 10 8/11

By financial calculator:

The IRR in this question can also be calculated using a financial calculator.

Enter CF0 -$38,500,000
C01 $3,668,578
F01 1
C02 $13,087,778
F02 1
C03 $18,755,528
F03 1
C04 $20,291,778
F04 1
C05 $29,694,591
F05 1
CPT IRR = 25.44%

Suggested keystrokes with Texas Instruments BA II PLUS:

Press CF 2nd [CLR WORK] to clear the work sheet.
After that, apply the following keystrokes.
38500000 +/- ENTER Down Arrow 3668578 ENTER Down Arrow Down Arrow

13087778 ENTER Down Arrow Down Arrow 18755528 ENTER Down Arrow Down
Arrow 20291778 ENTER Down Arrow Down Arrow 29694591 ENTER IRR CPT

 Output = 25.440579

Therefore IRR of the project = 25.44%.

F13 BUS-F301 Solution to Minicase of Chapter 10 9/11

By Excel:

A B C
1 Year Cash Flow

2 0 -$38,500,000 CF0 shows the cost of the project is $38,500,000
3 1 3,668,578 To calculate IRR, we use the function IRR(value)
4 2 13,087,778
5 3 18,755,528
6 4 20,291,778
7 5 29,694,590
8
9 IRR = 25.440579% Formula in Cell B9 is =IRR(B2:B7)

Note: For answer similar to this in Case Study 2, if you use Excel for your calculations, you are
required to present your answers in the way as shown above. That is, you need to include the
column heading and the row number as well as the Excel formula, in addition to the cash flows.
Otherwise, your working will be considered as incomplete.

4. The project NPV is:

By formula:

10.127,304,18$

)12.1(
591,694,29$
)12.1(
778,291,20$
)12.1(
528,755,18$
)12.1(
778,087,13$
)12.1(

578,668,3$
000,500,38$

%)121(
591,694,29$
%)121(
778,291,20$
%)121(
528,755,18$
%)121(
778,087,13$
%)121(

578,668,3$
000,500,38$NPV

54321
54321






















Note: For answer similar to this in Case Study 2, if you use the formula method for your
calculations, you need to show what numbers you put in the formula in the same way as the
above. Otherwise, your working will be considered as incomplete.

F13 BUS-F301 Solution to Minicase of Chapter 10 10/11

By financial calculator:

The NPV in this question can also be calculated using a financial calculator.

Enter CF0 -$38,500,000
C01 $3,668,578
F01 1
C02 $13,087,778
F02 1
C03 $18,755,528
F03 1
C04 $20,291,778
F04 1
C05 $ 29,694,591
F05 1
I 12%
CPT NPV = $18,304,127.10

Suggested keystrokes with Texas Instruments BA II PLUS:

Press CF 2nd [CLR WORK] to clear the work sheet.
After that apply the following keystrokes.
38500000 +/- ENTER Down Arrow 3668578 ENTER Down Arrow Down Arrow

13087778 ENTER Down Arrow Down Arrow 18755528 ENTER Down Arrow
Down Arrow 20291778 ENTER Down Arrow Down Arrow 29694591 ENTER
Down Arrow NPV 12 ENTER Down Arrow CPT

 Output = $18,304,127.10

Therefore NPV of the project = $18,304,127.10

Please note that if you have already entered all the cash flows in the previous question,
what you need to do here to get the NPV is just to press

NPV 12 ENTER Down Arrow CPT

F13 BUS-F301 Solution to Minicase of Chapter 10 11/11

By Excel:

A B C
1 Year Cash Flow

2 0 -$38,500,000
CF0 shows the cost of the project is
$38,500,000

3 1
3,668,578 To calculate NPV, we use the function

NPV(rate, value1, [value 2]..)
4 2 13,087,778
5 3 18,755,528
6 4 20,291,778
7 5 29,694,591
8

At required
rate of return

(discount rate)
= 12%

11 NPV = $18,304,127.10
Formula in Cell B11 is
=NPV(B9, B3:B7) + B2

Note: For answer similar to this in Case Study 2, if you use Excel for your calculations, you are
required to present your answer in the way as shown above. That is, you need to include the
column heading and the row number as well as the Excel formula, in addition to the cash flows
and required return. Otherwise, your working will be considered as incomplete.

Additional Notes

In the estimation of the cash flows for the new smart phone project, we should not include the
prototype developing cost of $750,000 and the marketing study cost of $200,000 because they
are sunk costs to the project. By definition, sunk costs are those costs that occurred prior to the
consideration of the project in hand. They cannot be recovered whether the project is accepted or
not. Thus, they are not incremental cash flows as a result of undertaking of the project and
should be irrelevant to the consideration of the project.

The fixed costs of the old smart phone production should not be included either. This is because
Conch has decided to continue the production of the old smart phone for just two more years.
This decision is independent of the new smart phone project. Besides, the existence or non-
existence of the fixed costs in the production of the old smart phones is not incremental to the
new smart phone project thus should be irrelevant to the consideration of the new smart phone
project.

The NPV rule suggests that the new smart phone project should be accepted since its NPV is
positive (i.e. > 0). The IRR and PI rules have the same suggestion as the project’s IRR > its
required rate of return and its PI is greater than 1. Since we are not given the cutoff payback
period, we cannot tell whether the project should be accepted or not just based on the computed
payback period. As the NPV and IRR are the primary investment rules and they both suggest the
new smart phone project should be accepted, we can probably conclude that the project should
be accepted.

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