Guide to the assignment on capital budgeting.
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 ci...
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BUS 5110 Managerial Accounting Unit 6 Written Assignment (WA)
Assignment Guide
BUS5110 Unit 6 Written Assignment
Question
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:
Page 1 of 6
, BUS 5110 Managerial Accounting Unit 6 Written Assignment (WA)
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 three main capital
budgeting calculations be done: NPV, IRR, and Payback Period 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.
Basic Concepts to Master
This assignment requires you to demonstrate your understanding of:
What capital budgeting is, its uses, and calculations of these 3 methods:
o Net present value (NPV) method
o Internal rate of return (IRR) method
o Payback method
Understand the pros and cons of the 3 methods
Analyze and explain the results, and recommend an appropriate action
Suggested Answer Guide
The paper should contain at least the following sections.
Title Page
o To comply with APA style, papers should have a title page. You can follow this
format for student papers:
Page 2 of 6
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