Reference no: EM133076276

People in this class should have an understanding of Capital Budgeting, Time Value of Money and spreadsheets. Analyze the following two projects from a Capital Budgeting perspective. Decide which one you would choose if you could only pick one and why. Input all the information into a spreadsheet and submit the numeric portion in the spreadsheet. Then have your write up be in Word. At a minimum, calculate NPV, IRR, Payback and Profitability Index per the way you learned in Corporate Finance (FMGT 2201).

So you are in the Finance Department of True Blood Soda Pop (TBSP) Inc. You have two projects on your desk and the boss (CEO) wants to know which one is better from a Financial perspective. For each option, there is an immediate upfront cost of $100,000. Then for each, there are revenues and expenses for each year. You will need to get a net cash flow for each year, and then come up with a present value for each year. The WACC for TBSP is 8%.

For option 1, TBSP is expanding into California, and it is a ten year project. For Revenue, years 1-3 have $35,000, years 4-6 have $40,000, and years 7-10 have $75,000. For Expenses, there are fees to operate in various counties and they are $1,000 per year in total. Product costs are $4,000 per year for the first 5 years and $8,000 per year after that. Sales commission expenses are 50% of sales. Finally, there are extra costs of $5,000 per year for the first three years.

For option 2, TBSP is expanding into Arizona, and it is a five year project. For Revenue, year 1 has $50,000, years 2-3 have $105,000, and years 4-5 have $25,000. For expenses, Arizona also has fees to operate in various counties and they are $1,000 per year in total. Product costs are $4,000 per year. Sales commission expenses are 50% of sales. Also, there are extra costs of $5,000 per year for the first three years.

For your spreadsheet, you will need to put revenues and expenses in rows, and then years in columns. Make it be ONE PAGE. Presentation is 20% of the grade. Highlight key numbers if you like. Use underlines and extra fonts to make your point. You will write a narrative to make your point, but highlight numbers on the spreadsheet to make things clear and obvious. Make sure to show net cash flow each year and also the NPV, IRR, PI and Payback.

For the narrative, discuss which project is better and why. Refer to the spreadsheet. Clarity is important here. Talk about returns, but assume the risk for each is the same and that the numbers estimated are accurate. Make this 1 full page of clear, concise information.