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6.5 Assignment Mini Case Study

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8 views

6.5 Assignment Mini Case Study

Assignment

Uploaded by

davie
Copyright
© © All Rights Reserved
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Assignment 6.

5
Mini-Case Study: Capital Budgeting with Fresnel Lenses
Fresnel Enterprises, Inc. is embarking on a new venture with a partner manufacturing company China. Fresnel has design
new line of screen guards for smartphones that not only protect screens, but also act as a magnifying glass. They expect th
new screen guards to be particularly popular with retirees in the United States, so are already planning a marketing campai
targeting the Florida and Arizona markets.

However, while Fresnel can manage design, marketing, and distribution in the United States, they have little manufacturing
expertise. So they have hired a contract manufacturer in China to handle actual production. Fresnel will supply the initial
investment dollars needed to set up the production and assembly lines in China, and then pay their partner a modest fee fo
each unit produced. Since they are handling distribution, there will also be some working capital investments required.

Fresnel is planning a 5-year time horizon for this project. At the end of year 5, the company will liquidate the assets from th
project. All assets will have been fully depreciated. A list of facts and assumptions, including sales forecasts for the life of t
project, are given in the tables to the right. =======>

Provide a financial analysis of this project to help determine if it should be pursued:


a) Using the information provided, create simple income statements for each year of the project. Calculate the annual Ope
Income (EBIT) and Net Income.
b) Create an analysis of the Working Capital needs and changes for each year (see the table at the top of page 263 of the
textbook for an example).
c) Determine the Free Cash Flow for each year of the project.
d) Calculate the project's NPV, BCR, and IRR.
e) Based on your analysis, very briefly explain whether this project should be pursued and why.

Create your Original Solution Below - Be sure to show all calculations, to carefully complete all parts of the assign

A. Fresnel Enterprises, Inc


Pro Forma Income Statement
Year 1 Year 2 Year 3 Year 4 Year 5
Sales $250,000 $650,000 $850,000 $800,000 $450,000
Design Cost $150,000 $150,000 $150,000 $150,000 $150,000
Selling and Adminstrative $95,000 $95,000 $95,000 $95,000 $95,000
EBIT (Operating Income)
$5,000 $405,000 $605,000 $555,000 $205,000
Depreciation $135,000 $135,000 $135,000 $135,000 $135,000
Interest
EBT ($130,000) $270,000 $470,000 $420,000 $70,000
Taxes ($27,300) $56,700 $98,700 $88,200 $14,700
Net Icome ($102,700) $213,300 $371,300 $331,800 $55,300

Working Capital Analysis


B. Year 1 Year 2 Year 3 Year 4 Year 5
Working Capital Needed
$62,500 $162,500 $212,500 $200,000 $112,500
WC Change $62,500 ($100,000) ($50,000) ($12,500) ($87,500)
Recovery of WC $112,500
Total WC Investment ($62,500.00) ($100,000) ($50,000) 12,500 200000

Free Cash Flow


C Year 1 Year 2 Year 3 Year 4
Equipment Investment $675,000
WC Investment ($62,500.00) ($100,000) ($50,000) 12,500
Afer-Tax Cash Flow 32300 348,300 506,300 466,800
Free Cash Flow ($675,000) ($30,200.00) $248,300.00 $456,300.00 $479,300.00
Required Return (%) 12%

D. NPV $ 346,834.80
BCR $0.51
IRR. 25.92%

E.

This project should be pursued because if


you look at the NPV, it outweights the cost
of benefit. Also, when looking at the IRR, it
is higher than the required return.
China. Fresnel has designed a
nifying glass. They expect the Design Costs, Already Incurred to Date $150,000 Note the red herring here. This is a sunk cos
lanning a marketing campaign Initial Cost of Equipment $675,000 Rather than asking students to do depreciatio
Annual Depreciation on Equipment $135,000 The assignment states assets will be fully de
After-Tax Salvage Value of Equipment Year 5 $65,000
ey have little manufacturing Annual Selling and Adminstrative Expenses $95,000
esnel will supply the initial
heir partner a modest fee for Production Costs (% of Sales) 35%
l investments required. Working Capital Investment (% of Sales) 25%
Effective Tax Rate (% of Taxable Income) 21%

liquidate the assets from the Required Return (%) 12%


ales forecasts for the life of the

Sales Projections
Year One $250,000
. Calculate the annual Operating Year Two $650,000
Year Three $850,000
the top of page 263 of the Year Four $800,000
Year Five $450,000

ete all parts of the assignment, and to clearly indicate answers (create additional worksheets to organize your work if necessary).
Year 5

200000
190,300
$390,300.00
herring here. This is a sunk cost and should not be considered.
sking students to do depreciation calculations this number is just given.
nt states assets will be fully depreciated. This is given as after-tax for astute students who realize the selling price of the equipment above bo

work if necessary).
of the equipment above book value would be taxable.
This is the Student Template, provided in the assignment instructions October 2019

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