Reference no: EM131146480

This is a project of Cost Accounting.

Creative Solutions, Inc. is a local firm that specializes in using its available capital to purchase assets and create small businesses. Creative Solutions receives all revenues and incurs all necessary expenses for the companies.

Your manager told you, "We just freed up $300,000 that needs to be put into a good project as soon as possible. I've received three proposals for the funds and I need to know which one will provide the best return and be in the best interest of our company. I'm depending on you to come up with the recommendation."

Required:  prepare a recommendation for him. Assume that Creative Solutions' cost of capital is 12% after tax and the tax rate is 34%. Assume each of the three projects starts on January 1, 2014 and will be terminated on December 31, 2023. In your recommendation, you will want to have a table showing the payback period, accounting rate of return, net present value, and internal rate of return for each proposal. You will also want to identify some important non-quantitative issues that should be considered. The format for the report should be a 1 to 2-page summary, .

Analysis (based on effort, reasonable assumptions, and accuracy):
This should include a table for each proposal (i.e. a printout of the Excel spreadsheet) showing the relevant cash flows for each year and calculations for payback, accounting rate of return, net present value, and internal rate of return. Please use the template provided to complete the Excel spreadsheet. (This spreadsheet is just a basic example; you could create your own if you think it need more information.)

Here is what I need for my part. I only ask you do 2 proposals. Please give me 2 tables of two following proposals; and a brief of your recommendations and why.

PROPOSAL A

Description of Project: Purchase an old building on Foothill Blvd. and remodel it into a Donut Shop.

Capital Needed
$200,000 to purchase land and building (60% building, 40% land, estimated selling price at the end of 2023 is $100,000 for the building and $50,000 for the land. Assume the building and the land will be sold for the estimated selling price at the end of 2023.)

$75,000 for new equipment (oven, mixers, counter tops, etc.) (Estimated life = 10 years, Salvage value = $10,000 (after-tax), assume the equipment will be sold for the salvage value at the end of its useful life.)

$25,000 for working capital - Assume the working capital will be released at the end of the project.

Expected Revenues and Expenses
Revenues:
Sales for 1st year - $400,000
Revenues expected to increase 5% per year

Expenses:
Depreciation - MACRS used for tax purposes (7-year for equipment and 20-year for building)
Materials - 50% of sales
Maintenance on machines - $6,000 per year (expected to increase 2% per year)
Advertising - Years 1-2 = $50,000; Year 3 = $40,000; Year 4 = $30,000; Years 5-6 = $25,000; Years 7-10 = $20,000
Salaries -1st year salaries = $110,000; salaare expected to increase 2% per year
Misc. Expenses - 5% of sales

PROPOSAL B

Description of Project: Purchase electronic and other games and lease bowling alley from the University Union. The university wants out of the business.

Capital Needed
$270,000 for games - Assume the games will be sold for $53,000 (after-tax) after 10 years.
$30,000 for working capital - Assume the working capital will be released at the end of the project.

Expected Revenues and Expenses
Revenues
Sales for 1st year - $200,000
Sales are expected to increase 4% per year

Expenses
Depreciation - MACRS used for tax purposes (10-year for games)
Maintenance on games - $15,000 per year (expected to increase 5% per year)
Special lane resurfacing - $70,000 at end of year 6 (treat as expense)
Salaries - 1st year salaries = $88,000; salaries are expected to increase 3% per year
Advertising - Years 1-5 = $5,000, Years 6-10 = $6,000
Misc. Expenses - 8% of sales
Lease payment - $25,000 due at end of each year for 10-year lease (treat as operating lease)