Capital Budgeting, maximum of 3 pages.
a. You are the CFO and a proposal has been submitted to invest
$300,000 into equipment that will produce a new product generating the
following cash flows. The hurdle rate
for the company is 7%.
i.
Year 1 = $62,000
ii.
Year 2 = $150,000
iii.
Year 3 = $136,000
b. Using IRR and NPV, would you accept the proposal?
c. Assume your primary competitor has already started producing a
similar product. As a result, you expect
your market share will decline over time and clients will be lost in the mid to
long term. Does this change your
decision? Why?
d.
Suppose the Year 3 cash flow
increased to $160,000. However, now assume that this production process will
triple the amount of waste that will need to be sent to the landfill. You also know that one of your primary
customers would sign a profitable long-term agreement for you to provide this
product. In addition, your investors
have been pressing hard for better returns.
Does this change your decision?
Why?
How do ethical and social
responsibilities weigh on your decision in this scenario?
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