Capital Budgeting Worksheet

Read the scenarios below and select one to review and analyze. Determine the proposal’s appropriateness and economic viability. For all scenarios, assume spending occurs on the first day of each year and benefits or savings occurs on the last day. Assume the discount rate or weighted average cost of capital is 10%. Ignore taxes and depreciation.

Proposal A: New Factory

A company wants to build a new factory for increased capacity. Using the net present value (NPV) method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:

• Building a new factory will increase capacity by 30%.

• The current capacity is $10 million of sales with a 5% profit margin.

• The factory costs $10 million to build.

• The new capacity will meet the company’s needs for 10 years.

• The factory is worth $14 million over 10 years.

Proposal B: New Equipment

A company wants to buy a labor-saving piece of equipment. Using the NPV method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:

• Labor content is 12% of sales, which are annually $10 million.

• The new equipment will save 20% of labor annually.

• The new equipment will last 5 years.

• The new equipment will cost $200,000.

Proposal C: New Advertising Program

A company wants to invest in a new advertising program. Using the NPV method of capital budgeting, determine the proposal’s appropriateness and economic viability with the following information:

• The new program will increase current sales, $10 million, by 20%.

• The new program will have a profit margin is 5% of sales.

• The new program will have a 3-year effect.

• The new program will cost the company $200,000 in the first year.