Finance Question

FIN3400 Capital Budgeting Assignment

Objective:

The objective of this assignment is to help you understand the process a company uses to determine the merits of a capital project. Companies use Net Present Value (NPV) and Internal Rate of Return (IRR) to determine if a project meets the required return. This assignment ties into SLO 10- Finance – Students will demonstrate the integration of specific knowledge and business skills in finance such as investment, financial policy, and commercial bank management. of creating an Income Statement, perform a scenario analysis, and calculate important financial metrics such as Net Present Value (NPV), Internal Rate of Return (IRR), and perform sensitivity analysis. You will apply these concepts to a hypothetical business project and analyze the results in different scenarios.

Part 1: Create a Simple Income Statement for Each of the Three Scenarios

1. Introduction to the Business Scenario: Imagine you are starting a small business that sells a product. Below are the basic assumptions for an optimistic, realistic, and pessimistic scenario:

Assumptions	Optimistic	Realistic	Pessimistic
Units	5,000	4,500	4,000
Sales Price	$95.00	$90.00	$85.00
Variable Costs	$60.00	$64.00	$68.00
Depreciation	$10,000	$10,000	$10,000
Interest Expense	$2,000	$2,000	$2,000
Fixed Costs	$25,000	$25,000	$25,000
Tax Rate	25.00%	25.00%	25.00%

1. Income Statement Format: Based on the above assumptions, create Income Statements for your business for each of these scenarios. Include the following line items:

• Sales
• Variable Costs
• Gross Profit
• Depreciation
• Fixed Costs
• Operating Income
• Interest Expense
• Taxable Income
• Taxes
• Net Income

Instructions:

• Fill out the income statement using the values provided.
• Calculate the missing values such as Gross Profit, Operating Profit, Taxable Income, Taxes, and Net Income.
• Calculate Operating Cash Flow

Part 2: Scenario Analysis Using NPV and IRR

1. Project Assumptions:

Assumptions for the Project:

• Initial Investment (Year 0): $200,000.00
• Discount Rate: The WACC for the company is 12%.
• Project Life: 5 years

1. NPV and IRR Calculations: Once Income Statements have been completed, calculate the NPV and IRR for each of the scenarios. You may use the Excel function keys or mathematical formulas. Be sure to show your work. Use operating cash flow for your cash inflows. Assume the cash flow remains constant for the 5-year life of the project.

Part 3: Sensitivity Analysis

1. Purpose of Sensitivity Analysis: Sensitivity analysis is used to understand how the NPV and IRR are affected by changes in key assumptions. In this case, you will vary both the price and variable costs.
2. Instructions:

• Perform sensitivity analysis on the following variables:
• Projected Cash Flows: Vary the price of the project using pessimistic values. Construct the New Income Statement for this sensitivity variable.
• Projected Variable Costs: Vary the variable costs of the project using pessimistic values. Construct the New Income Statement for this sensitivity variable.
• For each change, recalculate the NPV and IRR.
• Use the What If Analysis to construct a data table for each change.

1. Analysis:

• Discuss the results of the sensitivity analysis: How does changing each variable affect the NPV and IRR? Which assumptions have the greatest impact on the results?
• Based on all the information presented conclude as to the viability of the project. Be sure to defend your decision.

Deliverables:

1. Income Statement: Include completed Income Statements for each of three scenarios and two sensitivity analysis assumptions. Use the correct format.
2. NPV and IRR Calculations: Provide NPV and IRR calculations for each of three scenarios and two sensitivity analysis assumptions. Be sure to show your work.
3. Sensitivity Analysis Table: Present a table that shows the results of the sensitivity analysis for varying price and variable cost assumptions.
4. Analysis Report: Write a short report (300 500 words) summarizing your findings from the sensitivity analysis and ultimate project decision. Highlight key takeaways about how each factor influences the project’s financial metrics.

Submission Guidelines:

• All Income Statements, NPV calculations, and IRR calculations must be submitted on an Excel spreadsheet.
• All analysis must be submitted on a Word document using SafeAssign.
• Be sure to explain the steps you took to complete each part of the assignment.

Requirements: Excel and Word

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