Determine the incremental cash flows

Assignment Help Financial Management

Reference no: EM133358530

The case is open ending. The way you collect data may affect the results. You must collect or estimate the related data with references if you can't find them in the question. You can use either Top Down/ Bottom Up or CCA Tax Shield approach in the assignment.

Vita Smart Ltd is a leading high-tech company which is incorporated in Surrey, BC. The company wants to add a lab equipment in May 2023. They hired you, a UCW graduate, to prepare a capital budgeting plan for the project. Do you recommend the company to accept the project or not?

Below is the information that your manager provided:

1. The approximate cost of the machine would be $210,000, with another $10,500 in shipping and handling charges. It would also cost an additional $29,500 to install the equipment.

2. The equipment would be set up in an unused space at the company's main plant. The plant space could be leased out to another firm for $12,000 per year.

3. The machinery has an economic life of 5 years, but the manager didn't know the CCA classification and CCA rate. He estimated that the machinery is expected to have a salvage value of $23,000 after 5 years of use.

4. The new product line would generate incremental sales of 1,550 units per year for 5 years and they are expected to grow 7.5% per year.

5. The variable cost per unit is estimated in $55 per unit in the first year. Each unit can be sold for $220 in the first year.

6. The sales price and cost are both expected to increase due to inflation. The fixed costs are estimated to be $100,000 per year and would increase with inflation. The manager ask you to do the research about the inflation rate in recent years.

7. The company hired 8 workers to operate the new equipment and provided them 100 hours paid training according to BC minimum wage. They will work on the production line 40 hours per week under a five years contract with a 15 working days paid leave. The manager estimated the inventory level will increase 15% of the total sales every year due to expansion. The accounting teams said the new project won't affect A/R and A/P accounts in the future 5 years.

8. The company received $30,000 Research fund from BC government and decided to use 10% of them to do a market research on the new project. The engineers advised that there are at least $5,000 for the tunning fees, which will be paid from the funding.

9. The manager has concerns about the potential effects on other products when introducing the new equipment. Currently, he estimated a 2% decrease in sales revenue.

10. The firm is a small business which annual sales revenue under $500,000. The project is considered by the financial department to be as risky as the company. The financial department has estimate that the total WACC is 14% including $10,000 interest paid every year.

Requirement

1. Using an Excel spreadsheet:
• Determine the incremental cash flows.
• Find the NPV of the project by using the pro forma financial statement method to determine cash flows.
• Set up the necessary equations by referencing to the input variable cells. The spreadsheet must be formula driven; do not put any numbers in equations, must use cell references.
• Use Excel's built-in functions wherever possible
• Must list all the reference sources.

2. Recommendation
Use the results you obtained in the NPV to write a report (ALSO IN EXCEL) on your findings and recommend whether or not the company should proceed with the project with reasonings and references. The evaluation must be written in a professional way and at least 200 words.

3. Present this assignment in a professional way. It is your responsibility to communicate clearly to the marker.

4. Hand in by Excel Spread Sheets (One Excel File) (FOLLOW THESE INSTRUCTIONS STRICTLY):
• Spread Sheet 1, cover page with your name and student ID.
• Spread Sheet 2, NPV calculation: Data source, Income Statement, NPV. Must state the reasoning of the cash inflows/outflows.
• Spread Sheet 3, Project Evaluation/Summary
• Spread Sheet 4, References

Reference no: EM133358530

Questions Cloud

Compare and contrast the cultures of usa and vietnam : Lyft has narrowed down its entry mode (into Vietnam) to three options: licensing, a joint venture with a host country firm or setting up a wholly owned

Investigation firms that offer digital forensics services : Research private investigation firms that offer digital forensics services. Describes at least four rules or laws that affect digital forensics

Create integration management plan : Based on the previous assumptions, create integration management plan. Evaluate software as potential solutions to tracking and documentation.

Explain how they use economic integration : Pick an international country and a US company that interests you. Explain how they use economic integration and include the benefits and costs of doing this

Determine the incremental cash flows : Determine the incremental cash flows and Find the NPV of the project by using the pro forma financial statement method to determine cash flows

Great use of visual aid in oral presentation : What is a specific example of a great use of a visual aid in an oral presentation? What made the chosen visual aid effective?

Explain the central concept and basic justification : Explain the central concept and basic justification of the "Rights Based" approach to ethics. What may be some objections to its use in business organizations

Document approach for collecting requirements for project : Document your approach for collecting requirements for the project.

Explain the central concept of the utilitarianism : Explain the central concept and basic justification of the "utilitarianism" approach to ethics. What may be some objections to it's use in business organization

User Account

All Pages