Question Details

The Rondo Company Financial Decision Making
Project life is 5 years.

2.     Initial investment is $6,250,000 for equipment invoice, transportation, and installation.

3.     Worker training for operating new equipment is $15,000.

4.     First year sales are projected to be $7,500,000 escalated at 3% each year thereafter.

5.     Operating overhead (excluding depreciation) is estimated at 27% of annual sales.

6.     Administrative overhead is estimated at 35% of annual sales.

7.     Depreciation is straight line, 7 years.

8.     The tax rate is 40%.

9.     The new equipment can be salvaged at the end of the project (end of YR 5) for $1,500,000.

10.  Use Rondo- WACC of 10% to discount the project cash flows. 

Create an Excel cash flow spreadsheet and calculate the NPV and IRR.

Make your recommendation on the project.

Hint: You are only interested in the incremental cash flows. Create a spreadsheet from the above assumptions since they represent the incremental cash flows. Save yourself a big headache by not trying to incorporate other financial statement data exhibited in the case.

Also, list your assumptions and build the spreadsheet by incorporating the assumption value cells into the spreadsheet. The spreadsheet should automatically flow if an assumption value is changed

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