Fin 301, Principles of Finance, Fall 2019

Capital Budgeting Assignment – Due Date: Nov 14, 2019 at 11:59pm

NOTE: All analysis should be done in MS Excel, and a memo to your boss explaining the situation, your analysis, and conclusion should be prepared in MS Word. You must upload both files to be graded.

You will only get full credit for the assignment if your analysis is correct, all calculations and/or formulas use cell references, and your memo has the right content, flows well, and is properly formatted, and grammatically correct. An example of a good memo, and an Excel template is provided for your benefit. You can add or delete columns in the excel template as needed.

Zenix Corporation has a machine that either should be repaired or should be replaced soon. 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 $1,500,000 and cost to replace the machine is $9,000,000. 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 Cash flow (if repaired) Cash Flow (if replaced)

1 557,000 5,613,000

2 607,000 3,485,000

3 478,000 2,878,100

4 513,000 1,697,800

5 387,000 1,157,000

Zenix does not accept projects that will pay back in more than 3 years, or any projects that will not maximize shareholder wealth. So, you will need to use all capital budgeting techniques you’ve learnt in your Finance class to ensure that the right option is chosen.

Cost of capital for the project (repair or replacement) could be anywhere from 10% to 14%, so you will conduct your analyses at various weighted average cost of capital (WACC) or Required rate of return points including at least five at 9.0%, 11%, 13%, and 15% for both scenarios, and also draw an NPV profile for both situation using your calculations.

Use 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 capital budgeting 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.

Make sure that all your submissions have your full name, class, and section number included.