Fin 301, Principles of Finance Capital Budgeting Assignment

Fin 301, Principles of Finance Capital Budgeting Assignment

Subject: Business    / Finance
Question
Due Date: March 22, 2017 at 11:59pm
All analysis should be done in MS Excel, and a memo to your boss explaining the situation, your
analysis and conclusion should be written in MS Word. You must upload both files to be graded) Zenix Corporation has a machine that requires repairs or should be replaced. You have recently
been hired by Zenix and one of your assignments is to help decide whether replacing the
machine or repairing it is in the best interest of your company.
Investment required for repairing the machine is only $2,500,000 and cost to replace the machine
is $12,500,000. Repairing the machine will cut down on the number of returns from customers
and increase cash flows, while replacing the machine may increase the number of units sold.
Zenix has evaluated and calculated additional cash flows that will be generated under the two
scenarios over the next five years as follows:
Year
1
2
3
4
5 Cash flow (if repaired)
955,000
900,000
878,000
751,000
487,000 Cash Flow (if replaced)
6,513,000
4,855,000
3,878,100
2,969,800
1,751,000 Cost of capital for the project (repair or replacement) may vary anywhere from 10 to 14% for
both scenarios. You should therefore conduct your analysis with at least five WACC points –
10%, 11%, 12%, 13% and 14%. Zenix does not like to accept projects that will pay back in more
than 3 years.
You must conduct the analysis using your knowledge of capital budgeting and time value of
money to decide which of the options is better for ZENIX. All analysis must be done in Excel.
Your excel model should be such that it can be used by ZENIX for other similar situations – so
anyone can change any numbers and use the model again. This would require all calculations to
be using cell references and excel functions.
You must write a memo to your boss, explaining the situation, your analysis, and your
conclusion. You must also explain the drawbacks of your technique/s if there are any.
NOTE: You will only get full credit for the assignment if your analysis is correct, all calculation cells are either cell
references or formulae, and your memo is properly formatted, grammatically correct, with the right content and
the right flow. Excel template with few inputs already entered is provided for your benefit. You need to complete at
least the areas highlighted in blue. Add rows and columns for additional calculations if you need them.