There are three separate alternatives presented in the case: Scenario One, Two, and Three.
Click on the tabs below to see the three scenarios from the case along with additional assumptions. The assumptions in the three scenarios are given to create an example of the decision making process used in conjuction with capital budgeting tools.
These are your goals:
Using the budget figures and projection assumptions given, calculate a 5 year projected income statement and cash flow statement for each alternative. Include a sensitivity analysis.
Calculate net present value (NPV) and the internal rate of return (IRR – the hurdle rate or required rate of return) of future cash flows for each of the alternatives.
Calculate the weighted average cost of capital for each alternative and determine the optimal WACC.
Make a decision as to which alternative would be best for the organization. As you will see, each alternative not only has a different projection, but a different level of risk that is built into the NPV calculations.
Your work will be evaluated based on the way you analyzed the information, made assumptions, and how you presented your findings.
The scenarioo 3 is the most attractive as the NPV and the IRR are the hihgest among three alternatives.
