6.5 Assignment: Mini Case Study

 

1. Create pro forma income statements for each year of the proposed project.
2. Create a working capital analysis, showing needed working capital investments for each year of the proposed project.
3. Determine the free cash flow expected for each year of the project.
4. Calculate the project’s NPV, BCR, and IRR.
5. Finally, based on your analysis, briefly explain whether you believe the company should pursue this project and why.
6. Be sure your Excel spreadsheet is prepared in a professional manner, with answers clearly indicated and all your calculations shown. Full credit will not be given if your process for arriving at the answer is not fully displayed, including any intermediate steps.

 This table lists criteria and criteria group name in the first column. The first row lists level names and includes scores if the rubric uses a numeric scoring method.CriteriaLevel 4Level 3Level 2Level 1Criterion ScorePro Forma Income Statements10 points

You demonstrated a clear understanding of preparing the statements while using the appropriate format and approach.

9 points

You demonstrated competent understanding of preparing the statements, using an appropriate format and approach.

8 points

You demonstrated some understanding of preparing the statements, using an appropriate format and approach.

7 points

(0-7 Points)

You demonstrated little to no understanding of preparing the statements or did not use an appropriate format or approach.

Score of Pro Forma Income Statements,/ 10Working Capital Analysis10 points

You demonstrated a clear understanding of preparing the analysis while using the appropriate format and approach.

9 points

You demonstrated competent understanding of preparing the analysis, using an appropriate format and approach.

8 points

You demonstrated some understanding of preparing the analysis, using an appropriate format and approach.

7 points
(0-7 Points)

You demonstrated little to no understanding of preparing the analysis or did not use an appropriate format or approach.

Score of Working Capital Analysis,/ 10Free Cash Flow Calculations10 points

You demonstrated a clear understanding of performing the calculations while using the appropriate format and approach.

9 points

You demonstrated competent understanding of performing the calculations, using an appropriate format and approach.

8 points

You demonstrated some understanding of performing the calculations, using an appropriate format and approach.

7 points
(0-7 Points)

You demonstrated little to no understanding of how to perform the calculations or did not use an appropriate format or approach.

Score of Free Cash Flow Calculations,/ 10Capital Budgeting Calculations10 points

You demonstrated a clear understanding of performing the calculations while using the appropriate format and approach.
9 points
You demonstrated competent understanding of performing the calculations, using an appropriate format and approach.
8 points
You demonstrated some understanding of performing the calculations, using an appropriate format and approach.
7 points
(0-7 Points)
You demonstrated little to no understanding of how to perform the calculations or did not use an appropriate format or approach.

Score of Capital Budgeting Calculations,/ 10Capital Budgeting Decision10 points

Your evaluation of the capital budgeting decision was correct, clear, detailed, well-founded, and insightful.

9 points

Your evaluation of the capital budgeting decision was correct, clear and well-founded.

8 points

Your evaluation of the capital budgeting decision had minor errors, was not entirely clear, or was not well-founded.

7 points
(0-7 Points)

Your evaluation of the capital budgeting decision had serious errors, was unclear, or was unsupported.

Score of Capital Budgeting Decision,/ 10Rubric Total ScoreTotal/ 50

Overall Score

Fresnel Case

Assignment 6.5

Mini-Case Study: Capital Budgeting with Fresnel Lenses

Fresnel Enterprises, Inc. is embarking on a new venture with a partner manufacturing company China. Fresnel has designed a new line of screen guards for smartphones that not only protect screens, but also act as a magnifying glass. They expect the new screen guards to be particularly popular with retirees in the United States, so are already planning a marketing campaign targeting the Florida and Arizona markets.

Design Costs, Already Incurred to Date

$150,000

Note the red herring here. This is a sunk cost and should not be considered.

Initial Cost of Equipment

$675,000

Rather than asking students to do depreciation calculations this number is just given.

Annual Depreciation on Equipment

$135,000

The assignment states assets will be fully depreciated. This is given as after-tax for astute students who realize the selling price of the equipment above book value would be taxable.

After-Tax Salvage Value of Equipment Year 5

$65,000

However, while Fresnel can manage design, marketing, and distribution in the United States, they have little manufacturing expertise. So they have hired a contract manufacturer in China to handle actual production. Fresnel will supply the initial investment dollars needed to set up the production and assembly lines in China, and then pay their partner a modest fee for each unit produced. Since they are handling distribution, there will also be some working capital investments required.

Annual Selling and Adminstrative Expenses

$95,000

Production Costs (% of Sales)

35%

Working Capital Investment (% of Sales)

25%

Effective Tax Rate (% of Taxable Income)

21%

Fresnel is planning a 5-year time horizon for this project. At the end of year 5, the company will liquidate the assets from the project. All assets will have been fully depreciated. A list of facts and assumptions, including sales forecasts for the life of the project, are given in the tables to the right. =======>

Required Return (%)

12%

Sales Projections

Provide a financial analysis of this project to help determine if it should be pursued:

Year One

$250,000

a) Using the information provided, create simple income statements for each year of the project. Calculate the annual Operating Income (EBIT) and Net Income.

Year Two

$650,000

Year Three

$850,000

b) Create an analysis of the Working Capital needs and changes for each year (see the table at the top of page 263 of the textbook for an example).

Year Four

$800,000

Year Five

$450,000

c) Determine the Free Cash Flow for each year of the project.

d) Calculate the project’s NPV, BCR, and IRR.

e) Based on your analysis, very briefly explain whether this project should be pursued and why.

Create your Original Solution Below – Be sure to show all calculations, to carefully complete all parts of the assignment, and to clearly indicate answers (create additional worksheets to organize your work if necessary).

This is the Student Template, provided in the assignment instructions October 2019