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Written Assignment Unit 6
Submit a written paper which is 3-4 pages in length (no more than 4-pages), exclusive of the
reference page. Your paper should be double spaced in Times New Roman (or its
equivalent) font, which is no greater than 12 points in size. The paper should
cite at least three sources in APA format. One source can be your textbook.
Please describe the circumstances of the following case study
and recommend a course of action. Explain your approach to the problem, perform
relevant calculations and analysis, and formulate a recommendation. Ensure your
work and recommendation are
thoroughly supported.
Case Study:
A manufacturing company is evaluating
two options for new equipment to introduce a new product to its suite of goods.
The details for each option are provided below:
Option 1
·
$65,000 for equipment with
useful life of 7 years and no salvage value.
·
Maintenance
costs are expected to be $2,700 per year and increase by 3% in Year 6 and remain at that rate.
·
Materials in Year 1 are
estimated to be $15,000 but remain constant
at
$10,000 per year for the remaining years.
·
Labor is
estimated to start at $70,000 in Year 1, increasing by 3% each year after.
Revenues are estimated to be:
|
Year 1 |
Year
2 |
Year
3 |
Year
4 |
Year
5 |
Year
6 |
Year
7 |
|
- |
75,000 |
100,000 |
125,000 |
150,000 |
150,000 |
150,000 |
Option 2
·
$85,000
for equipment with useful life of 7 years and a $13,000 salvage value
·
Maintenance
costs are expected to be $3,500 per year and increase by 3% in Year 6 and remain at that rate.
·
Materials in Year 1 are
estimated to be $20,000 but remain constant
at
$15,000 per year for the remaining years.
·
Labor is
estimated to start at $60,000 in Year 1, increasing by 3% each year after.
Revenues are estimated to be:
|
Year 1 |
Year
2 |
Year
3 |
Year
4 |
Year
5 |
Year
6 |
Year
7 |
|
- |
80,000 |
95,000 |
130,000 |
140,000 |
150,000 |
160,000 |
The company’s required rate of return and cost of capital is 8%.
Management has turned to its finance and accounting department to perform analyses and make a
recommendation on which option to choose. They have requested that the four main
capital budgeting calculations be done: NPV, IRR, Payback Period, and ARR for each option.
For this assignment, compute all required amounts and explain
how the computations were performed. Evaluate the results for each option and
explain what the results mean. Based on your analysis, recommend which option
the company should pursue.
Superior papers will:
·
Perform all calculations correctly.
·
Articulate
how the calculations were performed, including from where values used in the calculations were obtained.
·
Evaluate
the results computed and explain the meaning of the results, including why certain measurements are more accurate
than others.
·
Recommend
which option to pursue, supported by well-thought-out rationale, and
considering any other factors that could impact the recommendation.
Be sure to use APA formatting in your paper. Purdue University’s
Online Writing Lab (OWL) is a free website that provides excellent information
and resources for understanding and using the APA format and style. The OWL
website can be accessed here: https://owl.purdue.edu/owl/research_and_citation/apa_style/apa_style_introductio n.html
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