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# INSTRUCTIONS

The major point of this assignment is for you to realize there are three separate alternatives pre
Using the budget figures and projection assumptions given, you are to calculate a 5 year projec
As in a real corporation, you can take each alternative, calculate the decision-making capital bu
(NPV and IRR) using a discount rate and risk factors (sometimes referred to as the hurdle rate a

Then, a decision can be made as to which alternative would be best for the organization. As yo
but a different level of risk that is built into the NPV calculations. Of course, all possible variable
flavor of what is used in the real-world in regards to capital budgeting.

Below are the three scenarios from the case along with additional assumptions in order for you
You can use the formats provided below as a way to organize the analysis. You will need to do
Remember Year 0 is when the initial investment is made, there are no sales or costs in that p

Note -- please realize that the assumptions in the three below scenarios are just that -- "assump
Scenarios sheet to the appropriate information on the back sheets. That will help you or

## 1) Year one projections are the same as the June Budget x 12

2) Year 2 and beyond -- Revenues projected at 10% increase per year.
3) Year 2 and beyond -- Varriable costs* -- increase at the same rate as sales.
4) Year two and beyond -- Fixed costs increase at a standard inflation rate of 3% per year.
5) Year two and beyond -- Depreciation increases at 20% per year.
6) Capital Expenditures -- Initially \$7,000,000; and an additional \$700,000 is years two, four, and in year five.
7) Labor wages & benefits decrease by 20% for year two due to technology savings -- then a 10% per year increase
Year 0
Revenue
High-End
Total Revenue
Cost of Goods *
High-End
Total Cost of Goods

Year 1
4,218,672
17,022,996
21,241,668

1,136,700
4,757,412
5,894,112

Net Revenue

15,347,556

Labor Wages
Office Salaries
Benefits
Supplies
Utilities

12,926,664
630,000
1,355,664
71,700
109,200

Insurance
Property Taxes
Total Operating Expense

36,000
11,700
15,140,928

## Earnings before Taxes & Depr

Depreciation
Earnings before Taxes

206,628
600,000
-393,372

Net Earnings

-393,372

600,000

760,620

-7,000,000

-553,992

## DISCOUNT RATE to use for calculating the NPV:

Add the calculated WACC to a risk rate your analysts have assigned to this scenario
Risk Rate Assigned = 1.6%
WACC data needed for calculation:
Cost of Debt = 8%
Desired Mix for weighting (Debt = 40%; Equity = 60%)
Cost of Equity data needed:
Next Annual Dividend = \$2
Current Stock Market Value = \$40
Dividend Growth Factor = 7%
WACC
9.27% WACC with risk rate
10.87%
NPV =
(\$197,125.18)
IRR =
10.02%

## three separate alternatives presented in the case verbiage.

are to calculate a 5 year projected income statement and cash flow as well as the WACC for each alternative.
the decision-making capital budgeting analyses
referred to as the hurdle rate and/or required rate of return).

est for the organization. As you will see, each alternative not only has a different projection,
Of course, all possible variables are not accounted but this exercise will give you a

## l assumptions in order for you to fulfill the requirements of this assignment.

e analysis. You will need to do the calculations for the various elements and factors as part of your analysis.
e are no sales or costs in that period it is the "present" of present value. There may be follow-on investments in s

enarios are just that -- "assumptions". They are given to create an example of the decision making process used

increase in technology.

## ears two, four, and in year five.

vings -- then a 10% per year increase in year three and beyond.
Year 2

Year 3

Year 4

Year 5

4,640,539
18,725,296
23,365,835

5,104,593
20,597,825
25,702,418

5,615,052
22,657,608
28,272,660

6,176,558
24,923,368
31,099,926

1,250,370
5,233,153
6,483,523

1,375,407
5,756,469
7,131,876

1,512,948
6,332,115
7,845,063

1,664,242
6,965,327
8,629,569

16,882,312

18,570,543

20,427,597

22,470,357

10,341,331
648,900
1,084,531
73,851
112,476

11,375,464
668,367
1,192,984
76,067
115,850

12,513,011
688,418
1,312,283
78,349
119,326

13,764,312
709,071
1,443,511
80,699
122,906

37,080
12,051
12,310,220

38,192
12,413
13,479,337

39,338
12,785
14,763,509

40,518
13,168
16,174,185

4,572,091
720,000
3,852,091

5,091,205
864,000
4,227,205

5,664,088
1,036,800
4,627,288

6,296,172
1,244,160
5,052,012

1,617,878

1,775,426

1,943,461

2,121,845

2,234,213

2,451,779

2,683,827

2,930,167

720,000

864,000

1,036,800

1,244,160

836,682

836,682

912,744

988,806

2,117,531

2,479,097

2,807,883

3,185,521

ach alternative.

w-on investments in subsequent years.

## 1) Year one projections are the same as the June Budget x 12

2) Year 2 -- Revenues decrease 10% and then increase at 5% .
3) Year 2 and beyond -- Varriable costs* -- increase at the same rate as sales.
4) Year two and beyond -- Fixed costs increase at a standard inflation rate of 3% per year.
5) Year two and beyond -- Depreciation increases at 10% per year.
6) Capital Expenditures -- Initially \$5,000,000; and an additional \$500,000 is years two, four, and in year five.
7) Labor wages & benefits decrease by 40% for year two due to converting to distribution -- then a 5% per year incre
8) Office Salaries increase by 20% for year two due to converting to distribution -- then a 5% per year increase in ye
Year 0
Year 1
Revenue
High-End
\$4,218,672
\$17,022,996
Total Revenue
\$21,241,668
Cost of Goods *
High-End
Total Cost of Goods

\$1,136,700
\$4,757,412
\$5,894,112

Net Revenue

\$15,347,556

Labor Wages
Office Salaries
Benefits
Supplies
Utilities
Insurance
Property Taxes
Total Operating Expense

\$12,926,664
\$630,000
\$1,355,664
\$71,700
\$109,200
\$36,000
\$11,700
\$15,140,928

## Earnings before Taxes & Depr

Depreciation
Earnings before Taxes

\$206,628
\$600,000
-\$393,372

\$0

Net Earnings

-\$393,372

\$600,000

\$718,300

-\$5,000,000

-\$511,672

## DISCOUNT RATE to use for calculating the NPV:

Add the calculated WACC to a risk rate your analysts have assigned to this scenario
Risk Rate Assigned = 5.1%

## WACC data needed for calculation:

Cost of Debt = 8%
Desired Mix for weighting (Debt = 40%; Equity = 60%)
Cost of Equity data needed:
Next Annual Dividend = \$2
Current Stock Market Value = \$40
Dividend Growth Factor = 7%
WACC
9.27% WACC with risk
NPV =
\$108,812.95
IRR =
15.05%

14.37%

## s two, four, and in year five.

tribution -- then a 5% per year increase in year three and beyond.
- then a 5% per year increase in year three and beyond.
Year 2
Year 3
Year 4

Year 5

\$3,796,805
\$15,320,696
\$19,117,501

\$3,986,645
\$16,086,731
\$20,073,376

\$4,185,977
\$16,891,068
\$21,077,045

\$4,395,276
\$17,735,621
\$22,130,897

\$1,023,030
\$4,281,671
\$5,304,701

\$1,074,182
\$4,495,754
\$5,569,936

\$1,127,891
\$4,720,542
\$5,848,433

\$1,184,285
\$4,956,569
\$6,140,854

\$13,812,800

\$14,503,440

\$15,228,612

\$15,990,043

\$7,755,998
\$648,900
\$813,398
\$73,851
\$112,476
\$37,080
\$12,051
\$9,453,755

\$8,143,798
\$668,367
\$854,068
\$76,067
\$115,850
\$38,192
\$12,413
\$9,908,755

\$8,550,988
\$688,418
\$896,772
\$78,349
\$119,326
\$39,338
\$12,785
\$10,385,975

\$8,978,538
\$709,071
\$941,610
\$80,699
\$122,906
\$40,518
\$13,168
\$10,886,510

\$4,359,046
\$660,000
\$3,699,046

\$4,594,685
\$726,000
\$3,868,685

\$4,842,637
\$798,600
\$4,044,037

\$5,103,533
\$878,460
\$4,225,073

\$1,553,599

\$1,624,848

\$1,698,496

\$1,774,531

\$2,145,446

\$2,243,837

\$2,345,541

\$2,450,542

\$660,000

\$726,000

\$798,600

\$878,460

\$790,130

\$790,130

\$861,960

\$933,790

\$2,015,316

\$2,179,707

\$2,282,181

\$2,395,212

## SCENARIO THREE - Paragraph 6 of Furniture Scenario - adding another product

1) Year one projections are the same as the June Actual x 12
2) Year 2 and beyond -- Revenues projected at 10% increase per year.
3) Year 2 and beyond -- Varriable costs* -- increase at the same rate as sales.
4) Year two and beyond -- Fixed costs increase at a standard inflation rate of 3% per year.
5) Year two and beyond -- Depreciation increases at 5% per year.
6) Capital Expenditures -- Initially 500,000; and an additional 50,000 is years two, four, and in year five.

Year 0
Revenue
High-End
Total Revenue

Year 1
\$4,218,672
\$17,022,996
\$21,241,668

Cost of Goods *
High-End
Total Cost of Goods

\$1,136,700
\$4,757,412
\$5,894,112

Net Revenue

\$15,347,556

Labor Wages*
Office Salaries
Benefits *
Supplies
Utilities
Insurance
Property Taxes
Total Operating Expense

\$12,926,664
\$630,000
\$1,355,664
\$71,700
\$109,200
\$36,000
\$11,700
\$15,140,928

## Earnings before Taxes & Depr

Depreciation
Earnings before Taxes

\$206,628
\$600,000
-\$393,372

\$0

Net Earnings

-\$393,372

\$600,000

-\$500,000

\$46,330
\$160,298

## TOTAL CASH FLOW FOR ANALYSIS

DISCOUNT RATE to use for calculating the NPV:
Add the calculated WACC to a risk rate your analysts have assigned to this scenario
Risk Rate Assigned = 0%

## WACC data needed for calculation:

Cost of Debt = 8%
Desired Mix for weighting (Debt = 40%; Equity = 60%)
Cost of Equity data needed:
Next Annual Dividend = \$2
Current Stock Market Value = \$40
Dividend Growth Factor = 7%
WACC
9.27%
NPV =
\$735,142.46
IRR =
45.95%

Year 2

Year 3

Year 4

Year 5

\$4,640,539
\$18,725,296
\$23,365,835

\$5,104,593
\$20,597,825
\$25,702,418

\$5,615,052
\$22,657,608
\$28,272,660

\$6,176,558
\$24,923,368
\$31,099,926

\$1,250,370
\$5,233,153
\$6,483,523

\$1,375,407
\$5,756,469
\$7,131,876

\$1,512,948
\$6,332,115
\$7,845,063

\$1,664,242
\$6,965,327
\$8,629,569

\$16,882,312

\$18,570,543

\$20,427,597

\$22,470,357

\$14,219,330
\$648,900
\$1,491,230
\$73,851
\$112,476
\$37,080
\$12,051
\$16,594,919

\$15,641,263
\$668,367
\$1,640,353
\$76,067
\$115,850
\$38,192
\$12,413
\$18,192,506

\$17,205,390
\$688,418
\$1,804,389
\$78,349
\$119,326
\$39,338
\$12,785
\$19,947,994

\$18,925,929
\$709,071
\$1,984,828
\$80,699
\$122,906
\$40,518
\$13,168
\$21,877,118

\$287,393
\$630,000
-\$342,607

\$378,037
\$661,500
-\$283,463

\$479,603
\$694,575
-\$214,972

\$593,238
\$729,304
-\$136,065

\$0

\$0

\$0

\$0

-\$342,607

-\$283,463

-\$214,972

-\$136,065

\$630,000

\$661,500

\$694,575

\$729,304

\$50,963
\$236,430

\$50,963
\$327,074

\$55,596
\$424,007

\$60,229
\$533,009