BUS 401 Week 4 Discussion | ashford university
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- 27 Jul 2021
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BUS 401 Week 4 Discussion | ashford university
Week 4 -
Discussion Forum
Your initial discussion thread is due on Day 3 (Thursday) and
you have until Day 7 (Monday) to respond to your classmates. Your grade will
reflect both the quality of your initial post and the depth of your responses.
Refer to the Discussion Forum Grading Rubric under the Settings icon above for
guidance on how your discussion will be evaluated.
Net Present
Value [WLOs: 1, 2] [CLOs: 1, 2, 3] |
When a business considers investing in a new project, the
decision must be carefully evaluated. Businesses should invest in projects that
are expected to add value to the company. One method to determine the added
value of a project is net present value (NPV) analysis. NVP analysis determines
the present value of the benefits and costs of a project. If the project’s NPV
is greater than $0, then the project is considered to add value to the company.
For this discussion, you will practice calculating the added value of project
using the NPV.
Prepare:
Prior to beginning work on this discussion forum,
·
Complete the Week 4 – Learning Activity 1.
·
Read Chapter 7
of Essentials of finance.
For the initial post, you will complete the NPV problem below.
You will not be able to see other students’ posts until you post your initial
post.
Problem:
A large auto company has just completed the research and
development (R&D) on a new product, the Electrobicycle. The Electrobicycle
is an electronic, climate-controlled bicycle with zero emissions. The R&D
efforts focused on developing the capability to utilize electricity to power
bicycles. Ultimately, the auto company expects Electrobicycles to be popular
for most urban citizens due to convenience and low cost.
The R&D, which cost $3 million, is complete and paid for.
The plant and equipment to mass produce the Electrobicycles will cost $2
million. This plant and equipment will be depreciated over 5 years using the
straight-line method to zero book value ($400,000 per year). A working capital
investment of $1 million will be needed at the beginning of the project. A
working capital investment of $200,000 per year will be needed thereafter.
At the end of 5 years, the auto company believes there will be
no more sales opportunities for Electrobicycles and will cease all production.
Thus, at the end of the project, all working capital investments (the $1
million initial investment and the $200,000 per year) will be recovered at full
value. The plant and equipment will be scrapped for a salvage value of $300,000
(after tax).
The company expects moderate sales in years 1 and 2, and then
significant growth in each year thereafter as consumers adopt the
Electrobicycles. Revenues and earnings will cease at the end of Year 5. The
revenues, after-tax earnings, and cash flow for the 5-year life of the project
are shown in this table.
Table 1
Projected
Electrobicycle Financial Projection
Numbers in $000’s
Today |
Year
1 |
Year
2 |
Year
3 |
Year
4 |
Year
5 |
|
Revenues |
$1,000 |
$1,500 |
$3,000 |
$6,000 |
$12,000 |
|
After-tax earnings |
($500) |
$100 |
$300 |
$600 |
$1,200 |
|
Project
Cash Flow |
||||||
After-tax earnings |
($500) |
$100 |
$300 |
$600 |
$1,200 |
|
Plus: Depreciation |
$400 |
$400 |
$400 |
$400 |
$400 |
|
Less: Cost of plant, equipment |
($2,000) |
$0 |
$0 |
$0 |
$0 |
$0 |
Less: Working capital |
($1,000) |
($200) |
($200) |
($200) |
($200) |
($200) |
Plus: Recovery of working capital |
n/a |
n/a |
n/a |
n/a |
$2,000 |
|
Plus: Salvage value |
n/a |
n/a |
n/a |
n/a |
$600 |
|
Annual project cash flow |
($300) |
$300 |
$500 |
$800 |
$4,000 |
Note: n/a = not
applicable
Calculate:
·
Determine the NPV for
the Electrobicycle project. Use the annual project cash flow from the table
above. For the required rate of return, use the percent value from your
birthday date. For example, if your birthday falls on the 16th of the month,
the required rate of return would be 16%.
o For guidance, review Section 7.1 of the
textbook, NPV Example: The Pizza
Scooter Delivery Project Revisited.
Write:
In your post, include the following:
·
Calculate the NPV of
the Electrobicycle project. Be sure to show your NPV calculations.
·
Explain, in your own words,
why working capital investments are subtracted each year in the cash flows.
·
Explain, in your own
words, the meaning of the required rate of return for the project.
·
Assume the auto
company has a required rate of return of 15%. Based on the required rate of
return you used for the Electrobicycles (based on your birthday date), is the
Electrobicycle project more or less risky than the auto company? Explain your
answer.
·
Based on your
concluded NPV, should the company invest in this project to build Electrobicycles?
Justify your answer.
Guided Response: Review several of your colleagues’ posts, and
reply to at least two of your peers by 11:59 p.m. on Day 7 of the week. You
must respond to two classmates who have completed different calculations than
you. In your written responses to your classmates, address the following:
·
Confirm the
calculations or explain a correction to the calculation in the initial post.
·
Compare how the
required rate of return you used differs from your classmate’s rate of return.
·
Explain how the
different rate of returns impacted the concluded NPV.
·
Explain why the
salvage value is added to the cash flows in the final year of the project.