Assignment 2: Cost Benefit Analysis

Anonymous

Question Description

Please see the attachment as it provided detail instruction on how to complete this assignment, please not that this is a two part assignment. First part must be done via an excel spreadsheet or via Microsoft word document., the 2nd part you must write and executive memo that provide information regarding the 1st part of the assignment. Please let me know if you have any questions.

Unformatted Attachment Preview

JWI 530: Financial Management I Assignment 2 Assignment 2: Cost-Benefit Analysis Parts A and B Due Sunday, Midnight of Week 10 (25% of Final Grade) Overview In this assignment, you will take on the role of a senior member of the finance team assigned to lead the investment committee of a medium-sized telecommunications equipment manufacturer. Your team is evaluating a “make-versus-buy” decision that has the potential to improve the company’s competitiveness, but which requires a significant capital investment in new equipment. The assignment is organized into two parts: Part A: Data calculations based on the information in the scenarios Part B: Recommendations based on the calculations Opportunity Details The new equipment would allow your company to manufacture a critical component in-house instead of buying it from a supplier. This capability would help you stabilize your supply chain (which has suffered from some irregularities and quality issues in the past). It could also have a positive impact on profitability through the absorption of fixed costs since this new machine will have plenty of excess capacity. There may even be a possibility that the company could leverage this capability to create a new external revenue stream by providing services to other companies. The company has been growing steadily over the past 5 years, and the financials and future prospects look good. Your CEO has asked you to run the numbers. After doing some digging into the business, you have gathered information on the following:  The estimated purchase price for the equipment required to move the operation in-house would be $500,000. Additional net working capital to support production (in the form of cash used in Inventory, AR net of AP) would be needed in the amount of $25,000 per year starting in year 0 and through all 5 years of the project to support production.  The current spending on this component (i.e. annual spend pool) is $875,000. The estimated cash flow savings of bringing the process in-house is 20% or annual savings of $175,000. This includes the additional labor and overhead costs required.  Your company has access to a credit line and could borrow the funds at a rate of 6%.  Finally, the equipment required is anticipated to have a somewhat short useful life, as a new wave of technology is on the horizon. Therefore, it is anticipated that the equipment will be sold after five years for $25,000. (i.e. the terminal value). © Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. This course guide is subject to change based on the needs of the class. 530 – Assignment 2 (1198) Page 1 of 6 JWI 530: Financial Management I Assignment 2 Input from Stakeholders As part of your research, you have sought input from a number of stakeholders. Each has raised important points to consider in your analysis and recommendation. Some of the points and assumptions are purely financial. Others touch on additional concerns and opportunities. 1. Ann, your colleague from Accounting, recommends using the base assumptions above: 5-year project life, flat annual savings, and 9% discount rate. Ann does not feel the equipment will have any terminal value due to advancements in technology. 2. Steve from Sales is convinced that this capability would create a new revenue stream that could significantly offset operating expenses. He recommends savings that grow each year: 5-year project life, 10% discount rate, and an 8% compounded annual savings growth in years 2 through 5. In other words, instead of assuming savings stay flat, assume that they will grow by 8% in year 2, and then grow another 8% over year 2 in year 3, and so on. 3. Ellen from Engineering believes we use a higher Discount Rate because of the risk of this type of project. As such, she is recommending a 5-year project life and flat annual savings. Ellen suggests that even though the equipment is brand new, the updated production process could have a negative impact on other parts of the overall manufacturing costs. She argues that, while it is difficult to quantify the potential negative impacts, to account for the risk, a 14% discount rate should be used. 4. Peter, the Product Manager, is convinced the new capability will allow better control of quality and on-time delivery, and that it will last longer than 5 years. He recommends using a 7 Year Equipment Life (which means a 7-year project and savings life), flat annual savings, and 10% discount rate. In other words, assume that the machine will last 2 more years and deliver 2 more years of savings. Peter also feels the equipment will have an estimated terminal value of $15,000 at the end of its 7year useful life. 5. Owen, the head of Operations, is concerned that instead of stabilizing the supply chain, it will just add another process to be managed, and will distract from the core competencies the company currently has. He feels the company should focus on improving communication and supply chain management with its current vendor, and he feels confident he can negotiate a discount of 4% off of the annual outsourcing cost of $875,000 if he lets it be known they are considering taking over this step of the process. As there is little risk associated with Owen’s proposal due to no upfront capital requirements, a lower risk-free discount rate of 7% would be appropriate. Owen feels that any price reductions from the current vendor will last for five years. (NOTE: because there is no “investment”, the Payback and IRR metrics are not meaningful…simply provide the NPV of the Savings cash flows). © Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. This course guide is subject to change based on the needs of the class. 530 – Assignment 2 (1198) Page 2 of 6 JWI 530: Financial Management I Assignment 2 PART A: Data Calculations Using the data presented above (and ignoring the extraneous information), for this profit and supply chain improvement project, calculate each of the following (where applicable):  Nominal Payback  Discounted Payback  Net Present Value  Internal Rate of Return Scenario Nominal Payback Discounted Payback N/A N/A Net Present Value Internal Rate of Return #1: Ann #2: Steve #3: Ellen #4: Peter #5: Owen N/A Submission Requirements Present your calculations and results either in an Excel Spreadsheet or in Word (using tables and headers to organize the information in a way that is clear and easy to read). Be sure to show your detailed calculations. If you get something wrong, you may still be able to get partial credit. © Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. This course guide is subject to change based on the needs of the class. 530 – Assignment 2 (1198) Page 3 of 6 JWI 530: Financial Management I Assignment 2 Part B: Recommendations After completing the calculations for all scenarios, create a brief memo to the CEO outlining your committee’s recommendations. You may organize the memo as you see fit, but it must include the following:  A clear opening statement of your recommendation for or against the project.  A brief synopsis of the processes and factors that led to your recommendations. o What information did you gather, and how did you get it? o From whom did you seek input, and why?  A summary of the strategic benefits and risks in pursuing (or not pursuing) this project, including: o Highlights of the main data points that support your position o Acknowledgement of the data points that oppose your argument o Identification of open/unresolved items  An identification of the scenario that, from a purely financial perspective, represents the most accurate estimate of the anticipated results and your rationale as to why.  An identification of non-financial elements that need to be considered for the recommended scenario.  Any assumptions in project economics can have a significant impact on the result. Identify 3 financial elements/assumptions in your analysis that would make this project financially unattractive. Be as transparent and candid with your BOD as possible. What would have to be true for this to be a bad investment?  A summary restating your recommendation and key action items. Submission Requirements  Your memo should be no more than 2 pages, single-spaced, using 10- or 12-point font.  Focus on the rationale for your recommendations. Include key numbers to support your recommendations, but do no re-present all your calculations. © Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. This course guide is subject to change based on the needs of the class. 530 – Assignment 2 (1198) Page 4 of 6 JWI 530: Financial Management I Assignment 2 RUBRIC 25% of Course Grade Assignment 2, Parts A and B Criteria 1. Correct answers for the investment recommendation scenarios. Weight: 30% 2. Showed work for calculations for the investment recommendation scenarios. Unsatisfactory Low Pass Pass High Pass Honors Did not demonstrate understanding, either by not submitting, or by calculating 8 or fewer answers correctly. Partially demonstrated understanding by calculating 9 to 10 answers correctly. Satisfactorily demonstrated understanding by calculating 11 to 12 answers correctly. Demonstrated a high level of understanding by calculating 13 to 14 answers correctly. Demonstrated exemplary understanding by calculating 15 or more answers correctly. Does not show work and/or has significant errors and shortcomings of process, order and calculation of metrics. Incorrectly demonstrates process, order and calculation and has many errors. Demonstrates basic level of understanding of process, order and calculation, but may have some errors. Shows process, order and calculation that mostly supports generation of the required metrics. Fully and Completely shows process, order and calculation of the required metrics Did not submit, or incompletely analyzed the investment options and did not address the key questions or explain recommendations. Provided minimal, basic analysis and recommendations addressing 3 or fewer of the required memo components and options. Provided good analysis and recommendations addressing at least 4 of the required memo components and options. Provided excellent analysis and recommendations addressing all required memo components and all 5 options. Provided exemplary analysis and recommendations addressing all required memo components and all 5 options; included additional insights drawing on learning from outside sources and demonstrating excellent business sense. Weight: 20% 3. Analyzed the investment opportunity leveraging the supplied data sets, and provided clear, well-reasoned recommendation s to the CEO. Weight: 40% © Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. This course guide is subject to change based on the needs of the class. 530 – Assignment 2 (1198) Page 5 of 6 JWI 530: Financial Management I Assignment 2 4. Professionally communicated with clear writing; concise and free of mechanical errors. Weight: 10% Written communication does not flow, and/or fails to justify or express recommendations; multiple mechanical errors; much of the communication is difficult to understand. Written communication is basic; fails to clearly connect conclusions and assertions to data; has several mechanical errors making parts of the text difficult to understand. Written communication flows well, but lacks conciseness or clarity in places; assertions and conclusions are generally justified and explained; contains several minor grammatical errors. Written communication flows well; concisely and clearly expresses recommendations in a manner that rationally and logically develops the topics; there are a few mechanical errors. Written communication is excellent; concisely and clearly expresses recommendations in an exemplary manner that rationally and logically develops the topics; free of mechanical errors. © Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. This course guide is subject to change based on the needs of the class. 530 – Assignment 2 (1198) Page 6 of 6 ...
Purchase answer to see full attachment

Tutor Answer

ChloeL134
School: UCLA

Here you go. In case of any further edits please let me know!It was good working with you! 👋 Thanks for using Studypool. Take care and good luck!

Running head: COST BENEFIT ANALYSIS

Memorandum
Name
Course
Professor
Date

1

COST BENEFIT ANALYSIS

2
Memorandum

To: Supervisor

Date: December 2019

From: Finance Officer
Subject: COST BENEFIT ANALYSIS
Opening statement
The business should follow Owen's recommendations. This option generates a shorter
nominal and discounted payback of 2.7 and 3.10 years. It also had a Net Present Value of
276361.18 and the highest internal rate of return of 17.33%. Following these options is likely
to increase the profits generated by the business in any financial year. On the other hand,
Ann’s recommendations have the lowest returns for the business. Undertaking it results in
more profits for the company.

Scenario

Nominal

Discounted

Net present

Internal rate of

payback

payback

value

return

#1 Ann

4.14 N/A

#2 Steve

3.59

#3 Ellen

4.14 N/A

#4 Peter

4.17

#5 Owen

2.70

-16993.56

-1.18%

74079.84

4.67%

-75046.07

-5.51%

5.67

91907.63

4.84%

3.10

276361.18

17.33%

4.43

Brief synopsis
Multiple factors are considered in the generation of cash flows. One evaluates the
growth in revenues from one financial year to the other. The cash flows are divided into the
cash inflows and cash outflows. Inflows are made up of the cash savings and the terminal

COST BENEFIT ANALYSIS

3

salvage value. Besides, the cost elements are other crucial issues. One considers the
additional working capital, the tax expense, the financial cost, and depreciation. It is vital to
add the depreciation at the end, as it is a non-cash item. The information is found from
companies that have undertaken similar projects. It may be found from experts with
knowledge of the project.
Strategic benefits and risks
Various criteria are used in the evaluation of a project. One should consider issues
such as NPV, IRR, and the payback period. These periods may be nominal or discounted. It is
vital to take a project that has the h...

flag Report DMCA
Review

Anonymous
Solid work, thanks.

Anonymous
The tutor was great. I’m satisfied with the service.

Anonymous
Goes above and beyond expectations !

Studypool
4.7
Trustpilot
4.5
Sitejabber
4.4

Brown University





1271 Tutors

California Institute of Technology




2131 Tutors

Carnegie Mellon University




982 Tutors

Columbia University





1256 Tutors

Dartmouth University





2113 Tutors

Emory University





2279 Tutors

Harvard University





599 Tutors

Massachusetts Institute of Technology



2319 Tutors

New York University





1645 Tutors

Notre Dam University





1911 Tutors

Oklahoma University





2122 Tutors

Pennsylvania State University





932 Tutors

Princeton University





1211 Tutors

Stanford University





983 Tutors

University of California





1282 Tutors

Oxford University





123 Tutors

Yale University





2325 Tutors