Deluxe Capital Budget Analysis, business and finance homework help

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Financial Management - BUS 530 Case Paper – Capital Budget Analysis Prepare in APA Format – Your paper should include a capital budget analysis, an interpretation of the analysis and your recommended strategy for the Deluxe Corporation. Your paper is due in Blackboard on Saturday August 5 at Midnight. Deluxe Corporation is a large chain of retail stores operating in the USA. It sells top-of therange, expensive clothes to a wealthy clientele throughout the country. Currently, Deluxe only operates in the USA. Its current market capitalization is $760 million and the current market value of debt is $350 million. At last month’s management meeting the marketing director explained that sales volume had increased slightly in the previous year, largely due to heavy discounting in most of its stores. The finance director expressed concern that such a strategy might damage the image of the company and reduce profits over the longer term. An alternative strategy to increase sales volume has recently been proposed by the marketing department. This would involve introducing a new range of clothing specifically aimed at the middle-income market. The new range of clothing would be expected to be attractive to consumers in Canada and Europe. Assume your represent the financial management of Deluxe and have been asked to evaluate the marketing department’s proposal to introduce a new range of clothing. An initial investigation into the potential markets has been undertaken by a firm of consultants at a cost of $100,000 but this amount has not yet been paid. It is intended to settle the amount due in three months’ time. With the help of a small multi-department team of staff you have estimated the following cash flows for the proposed project: • The initial investment required would be $46 million: This comprises $30 million for fixed assets and $16 million for net current assets (working capital). • For accounting purposes, fixed assets are depreciated on a straight line basis over three (3) years after allowing for a residual value of 10%. • The value of net current assets at the end of the evaluation period can be assumed to be the same as at the start of the period. • Earnings before taxes are forecast to be $14 million in 2017, $17million in 2018 and $22 million in 2019. The following information is also relevant: • The proposed project is to be evaluated over a three-year time horizon. The firm uses Net Present Value and Internal Rate of Return methods to evaluate projects. • Deluxe usually evaluates its investments using an after-tax discount rate of 8%. The proposed project is considered to be riskier than average and so a risk-adjusted rate of 9% will be used for this project. Case Paper – La Verne Campus Page 1 Financial Management - BUS 530 Case Paper – Capital Budget Analysis • Corporate tax is 25%. • Ignore inflation. • Prepare a Sensitivity Risk Analysis with the following variables: Earnings Before Taxes, Project Discount Rate, and Tax Rate. Your margins of variance are plus/minus 10%, 20%, 30%. Your Sensitivity work should include a graph analysis. Case Paper – La Verne Campus Page 2 BUS 530: MANAGING FINANCIAL RESOURCES RUBRIC – Case Paper Deluxe Corporation Objective measured: Maximize firm value by efficiently allocating financial resources in an environment of uncertainty. Forecast cash flows under different earnings scenarios - 20% Excellent Good Satisfactory Correctly Allow Missing one Initial Investment calculation miscalculating of the Calculate the annual depreciation one or two of the requirements based on the depreciable part of the requirements investment Forecast the net annual cash flows under the given scenarios Calculate NPV and IRR to determine capital return analysis - 20% Excellent Good Satisfactory Correctly calculate the weighted One or two More than average NPV, IRR, Payback, and arithmetic errors two Profitability Index based on the arithmetic given scenarios errors Perform sensitivity analysis - 15% Excellent Correctly Calculate the changes in the NPV for the average scenario for changes of +/- 10%, +/- 20%, +/- 30% with respect to the required variable. Analyze the sensitivity of the NPV and IRR with respect to the required variables. Good Allow miscalculating one or two of the requirements Satisfactory Missing one of the requirements Unsatisfactory Missing more than one of the requirements Unsatisfactory Not using the probabilities to calculate the weighted average NPV Unsatisfactory Missing more than one of the requirements Assess the riskiness of the project - 15% Excellent Good Correctly assess and argue in Assess the support of the level of the overall riskiness without riskiness of the project providing supporting arguments Make accept/reject decision - 15% Excellent Good Utilize the weighted average NPV Not used analysis to correctly express an opinion on the acceptability of the project Satisfactory Not used Unsatisfactory Not assess the riskiness of the project Satisfactory Not used Unsatisfactory Not utilizing NPV APA Format presentation and quality of written assessment - 15% Excellent Good Satisfactory Overall score of excellent in above Good average in satisfactory categories above categories average in above categories Unsatisfactory unsatisfactory average in above categories
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Running head: SENSITIVITY ANALYSIS

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Sensitivity Analysis
Name
Date

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SENSITIVITY ANALYSIS
Sensitivity Analysis
Deluxe Corporation sells expensive clothes to the wealthy in America. Deluxe sells their
products in retail stores throughout the United States. The sensitivity analysis revolves around
changing the value of earnings before taxes, discount rate and tax rate. This is done by adding
10,20 and 30% to each figure in the related excel file.

There are many points to be examined with respect to the sensitivity analysis. First, when
the ear...


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