I need a assignment done for week 10 for my Financial Managment 1 class

JWI 530: Financial Management I

Assignment 2

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JWI 530 Assignment 2 (1222) Page 1 of 5

• The estimated purchase price for the equipment required to move the operation in-house would be

$700,000. Additional net working capital to support production (in the form of cash used in Inventory,

AR net of AP) would be needed in the amount of $30,000 per year starting in year 0 and through all

years of the project to support production as raw materials will be required in year o and all years to

run the new equipment and produce components to replace those purchased from the vendor.

• The current spending on this component (i.e., annual spend pool) is $1,500,000. The estimated

cash flow savings of bringing the process in-house is 16.67% or annual savings of $250,000. This

includes the additional labor and overhead costs required.

• Finally, the equipment required is anticipated to have a somewhat short useful life, as a new wave of

technology is on the horizon. Therefore, it is anticipated that the equipment will be sold after the end

of the project (the last year of generated cash flow) for $30,000. (i.e. the terminal value).

Assignment 2: Cost-Benefit Analysis Parts A and B Due Sunday, Midnight of Week 10 (25% of Final Grade)

Overview

In this assignment, you will take on the role of a senior member of the finance team assigned to lead the

investment committee of a health care equipment manufacturer. Your team is evaluating a “make-versus-buy”

decision that has the potential to improve the company’s competitiveness, but which requires a significant

capital investment in new equipment. The assignment is organized into two parts:

Part A: Data calculations based on the information in the scenarios

Part B: Recommendations based on the calculations

Opportunity Details

The new equipment would allow your company to manufacture a critical component in-house instead of buying

it from a supplier. This capability would help you stabilize your supply chain (which has suffered from some

irregularities and quality issues in the past). It could also have a positive impact on profitability through the

absorption of fixed costs since this new machine will have plenty of excess capacity. There may even be a

possibility that the company could leverage this capability to create a new external revenue stream by providing

services to other companies.

The company has been growing steadily over the past 5 years, and the financials and future prospects look

good. Your CEO has asked you to run the numbers. After doing some digging into the business, you have

gathered information on the following:

JWI 530: Financial Management I

Assignment 2

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JWI 530 Assignment 2 (1222) Page 2 of 5

Input from Stakeholders

As part of your research, you have sought input from a number of stakeholders. Each has raised important

points to consider in your analysis and recommendation. Some of the points and assumptions are purely

financial. Others touch on additional concerns and opportunities.

1. Angela, your colleague from Accounting, recommends using the base assumptions above: 5-year

project life, flat annual savings, and 10% discount rate. Angela does not feel the equipment will

have any terminal value due to advancements in technology.

2. Bob from Sales is convinced that this capability would create a new revenue stream that could

significantly offset operating expenses. He recommends savings that grow each year: 5-year

project life, 10% discount rate, and a 10% annual savings growth in years 2 through 5. In other

words, instead of assuming savings stay flat, assume that they will grow by 10%% in year 2, and

then grow another 10% over year 2 in year 3, and so on. Bob feels that the stated terminal value of

$30,000 is reasonable and used it in his calculations.

3. Carl from Engineering believes we use a higher Discount Rate because of the risk of this type of

project. As such, she is recommending a 5-year project life and flat annual savings. Carl suggests

that even though the equipment is brand new, the updated production process could have a

negative impact on other parts of the overall manufacturing costs. He argues that, while it is difficult

to quantify the potential negative impacts, to account for the risk, a 15% discount rate should be

used. Being an engineer, Carl feels that the stated terminal value is low based on his experience

and is recommending a $55,000 terminal value.

4. Delilah, the Product Manager, is convinced the new capability will allow better control of quality and

on-time delivery, and that it will last longer than 5 years. He recommends using a 7 Year Equipment

Life (which means a 7-year project and that savings will continue for 7 years), flat annual savings,

and 10% discount rate. In other words, assume that the machine will last 2 more years and deliver

2 more years of savings. Delilah also feels the equipment will have an estimated terminal value of

$20,000 at the end of its 7- year useful life as it will be utilized longer thus having less value at the

end of the project and savings.

5. Edward, the head of Operations, is concerned that instead of stabilizing the supply chain, it will just

add another process to be managed, and will distract from the core competencies the company

currently has. He feels the company should focus on improving communication and supply chain

management with its current vendor, and he feels confident he can negotiate a discount of 3% off

of the annual outsourcing cost of $1,500,000 if he lets it be known they are considering taking over

this step of the process. As there is little risk associated with Edward’s proposal due to no upfront

capital requirements, a lower risk-free discount rate of 7% would be appropriate. Edward feels that

any price reductions from the current vendor will last for five years. (NOTE: because there is no

“investment”, the Payback and IRR metrics are not meaningful. Simply provide the NPV of the

Savings cash flows).

JWI 530: Financial Management I

Assignment 2

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JWI 530 Assignment 2 (1222) Page 3 of 5

PART A: Data Calculations

Using the data presented above (and ignoring the extraneous information), for this profit and supply

chain improvement project, calculate each of the following (where applicable):

• Nominal Payback

• Discounted Payback

• Net Present Value

• Internal Rate of Return

Scenario Nominal

Payback

Discounted

Payback

Net Present

Value

Internal Rate of

Return

#1: Angela

#2: Bob

#3: Carl

#4: Delilah

#5: Edward N/A N/A N/A

Submission Requirements

Present your calculations and results either in an Excel Spreadsheet or in Word (using tables and headers

to organize the information in a way that is clear and easy to read). Be sure to show your detailed

calculations. If you get something wrong, you may still be able to get partial credit.

JWI 530: Financial Management I

Assignment 2

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JWI 530 Assignment 2 (1222) Page 4 of 5

Part B: Recommendations

After completing the calculations for all scenarios, create a brief memo to the CEO outlining your

committee’s recommendations. You may organize the memo as you see fit, but it must include the following:

• A clear opening statement of your recommendation for or against the project.

• A brief synopsis of the processes and factors that led to your recommendations.

o What information did you gather, and how did you get it?

o From whom did you seek input, and why?

• A summary of the strategic benefits and risks in pursuing (or not pursuing) this project, including:

o Highlights of the main data points that support your position

o Acknowledgement of the data points that oppose your argument

o Identification of open/unresolved items

• An identification of the scenario that, from a purely financial perspective, represents the most

accurate estimate of the anticipated results and your rationale as to why.

• An identification of non-financial elements that need to be considered for the recommended

scenario.

• Any assumptions in project economics can have a significant impact on the result. Identify 3 financial

elements/assumptions in your analysis that would make this project financially unattractive. Be as

transparent and candid with your BOD as possible. What would have to be true for this to be a bad

investment?

• A summary restating your recommendation and key action items.

Submission Requirements

• Your memo should be no more than 2 pages, single-spaced, using 10- or 12-point font.

• Focus on the rationale for your recommendations. Include key numbers to support your

recommendations but do no re-present all your calculations.

JWI 530: Financial Management I

Assignment 2

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JWI 530 Assignment 2 (1222) Page 5 of 5

RUBRIC

25% of Course

Grade Assignment 2, Parts A and B

Criteria Unsatisfactory Low Pass Pass High Pass Honors

1. Correct answers for the investment recommendation scenarios.

Weight: 25%

Did not demonstrate understanding, either by not submitting, or by calculating 8 or fewer answers

correctly.

Partially demonstrated understanding by calculating 9 to

10 answers correctly.

Satisfactorily demonstrated understanding by calculating 11 to

12 answers correctly.

Demonstrated a high level of understanding by calculating 13 to

14 answers correctly.

Demonstrated exemplary understanding by calculating 15 or more answers correctly.

2. Showed work for

calculation for the

investment

recommendation

scenarios

Weight: 20%

Does not show

work and/or has

significant errors

and shortcomings

of process, order

and calculation of

metrics.

Incorrectly demonstrates process, order and calculation and has many errors.

Demonstrates

basic level of

understanding of

process, order and

calculation, but

may have some

errors.

Shows process,

order and

calculation that

mostly supports

generation of the

required metrics.

Fully and completely

Completely shows

process, order

and calculation of

the required

metrics.

3. Analyzed the

investment

opportunity

leveraging the

supplied data

sets, and

provided clear,

well-reasoned

recommendations

to the CEO.

Weight: 45%

Did not submit, or

incompletely

analyzed the

investment options

and did not address

the key questions

or explain

recommendations.

Provided minimal,

basic analysis and

recommendations

addressing 3 or

fewer of the

required memo

components and

options.

Provided good

analysis and

recommendations

addressing at least

4 of the required

memo components

and options.

Provided excellent

analysis and

recommendations

addressing all

required memo

components and

all 5 options.

Provided exemplary

analysis and

recommendations

addressing all

required memo

components and all

5 options; included

additional insights

drawing on learning

from outside

sources and

demonstrating

excellent business

sense.

4. Professionally

communicated

with clear writing;

concise and free

of mechanical

errors.

Weight: 10%

Written

communication does

not flow, and/or fails

to justify or express

recommendations;

multiple mechanical

errors; much of the

communication is

difficult to

understand.

Written

communication is

basic; fails to

clearly connect

conclusions and

assertions to data;

has several

mechanical errors

making parts of the

text difficult to

understand.

Written

communication

flows well but lacks

conciseness or

clarity in places;

assertions and

conclusions are

generally justified

and explained;

contains several

minor grammatical

errors.

Written

communication

flows well;

concisely and

clearly expresses

recommendations

in a manner that

rationally and

logically develops

the topics; there

are a few

mechanical errors.

Written

communication is

excellent; concisely

and clearly

expresses

recommendations

in an exemplary

manner that

rationally and

logically develops

the topics; free of

mechanical errors.