Reference no: EM132267748

Capital Budgeting in Action

Investing in a Juice factory: A Capital Budgeting Analysis

Instructions: The assignment is based on the case below for which you need to answer all questions in a report format. The instructions relating to the assignment are given at the end of the case.

Two recent college graduates own a restaurant and want to decide whether to invest in a Juice factory system, which would allow the pair to sell Juices on tap to their customers. The business owners must complete a thorough cash flow analysis of their planned investment using the concepts of operating cash flows, working capital investment and capital expenditures. They need to have a keen understanding of relevant versus non-relevant cash flows. Further, they must use these cash flows in order to come up with the net present value (NPV) and internal rate of return (IRR) of the investment under different realistic business scenarios. Both entrepreneurs must use sensitivity analysis to see how their investment decision may or may not change as a result of varying costs of capital. In the end, the pair needs to decide whether to invest in the Juice factory in light of their full analysis.

In view of the above discussion and information provided in the case you are expected to submit a detailed report by the end of week 8 covering the following:

1. An introduction to your report focusing on the importance of capital budgeting decisions and its key motives in the context of a given case.

2. Summarize the key facts of the given case identify the problems faced by both entrepreneurs.

3. Discuss some approaches that can be used to solve this issue.

4. Regarding a Case answer the following questions:
A. Estimate the annual cash flows for the Juice factory project. Use the "best case scenario." To do this, you will need to calculate the annual revenues and annual expenses for the 10-year project, any changes in net working capital, and any changes to capital expenditures. Describe all assumptions and calculations you used to arrive at the final cash flows.
B. Calculate the NPV and IRR of the project given the information presented using the "best case scenario." Should Manal and Ibrahim go ahead with the Juice factory investment? Why or why not?
C. What would be the impact on NPV and IRR if the "worst case scenario" occurs? Would this alter Ibrahim and Manal's decision whether to invest in the Juice factory? Describe how you found this result (also show in the spreadsheet).
D. Suppose they are operating under the best case scenario and they decide that in year 5 they would like to do major renovations to the restaurant (a capital expense). They figure this will cost an additional Rial Omani 100,000 in year 5. Along with the renovations, they figure they could increase the price of the Juice to Rial Omani 1.4 per serving and keep it at that price for the duration of the project. How do these changes impact NPV and IRR? Is it worth it for the pair to go forward with the renovations? Describe how you found this result (also show in the spreadsheet).
E. Would there be a significant impact to Manal and Ibrahim's Juice factory decision if there were a change in the cost of capital? Describe how you found this result (also show in the spreadsheet).
F. Are there any other issues that you think might influence the investment decision? What, if anything, have Manal and Ibrahim not considered in their capital budgeting analysis?

5. Briefly state the limitations of the approaches they have used in making this decision, and outline what further analysis you would recommend.
An excellent paper provides concise yet thorough action-oriented recommendations using appropriate subject-matter justifications related to the problem while addressing limitations of the solution and outlining recommended future analysis.

6. In your conclusion, you are required to summarize your overall findings and your recommendations.

Attachment:- Case.rar