HBS Valued Project Case Study

7/17/2019 HBS Valued Project Case Study

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Growth Enterprise , Inc. (GEI)

Project Type of cash flow Year 0 Year 1 Year 2 Year 3

A. Investment -$10,000 0 0 0

Revenue 0 $21,000 0 0

Operating expense 0 $11,000 0 0

Lifespan 1Depreciation $10,000

ree !ash low "10,000

B. Investment -$10,000 0 0 0

Revenue 0 $1,000 $1!,000 0

Operating expense 0 $,"## $!,"## 0

Lifespan 2

Depreciation $,000 $,000

ree !ash low "#,$00 "#,$00

. Investment -$10,000 0 0 0

Revenue 0 $10,000 $11,000 $#0,000

Operating expense 0 $, $%,""& $1,

Lifespan #

Depreciation $#,### $#,### $#,###

ree !ash low "%,000 "$,000 "10,000

D. Investment -$10,000 0 0 0

Revenue 0 $#0,000 $10,000 $,000

Operating expense 0 $1, $, $2,222

Lifespan #

Depreciation $#,### $#,### $#,###

ree !ash low "10,000 "%,000 "3,000

1&a). !alc'late Payac of each project an* ran the fo'r projects in or*er of preference ase* on pa

Project Initial +'tlay Year 1 Year 2 Year 3 Payac

$10,000 $0 $0 1

Outstan'in -10000 $0 $0 $0

- $!,00 $!,00 $0 0.## 1.33

Outstan'in -10000 -$2,00 $,000 $,000

! $%,000 $,000 $10,000 0.10 2.1

Outstan'in -10000 -$(,000 -$1,000 $&,001

$10,000 $%,000 $#,000 1

Outstan'in -10000 $0 $%,001 $!,001

Payac perio* is 1 year for project , 1.33 years for project -, 2.1 years for project ! an* 1 year for

1&). !alc'late I// of each project an* ran the fo'r projects in or*er of preference ase* on I// (2

- !

Initia) Out) -$10,000 -$10,000 -$10,000 -$10,000

*ear 1 $10,000 $!,00 $%,000 $10,000

*ear 2 $0 $!,00 $,000 $%,000



*ear # $0 $0 $10,000 $#,000

I// 0.00 31. 33.$3 %2.#$

1&c). ss'in a 10 *isco'nt rate, calc'late the 4P5 of the fo'r projects an* ran the projects in o

- !

*ear 0 -$10,000 -$10,000 -$10,000 -$10,000

*ear 1 $10,000 $!,00 $%,000 $10,000

*ear 2 $0 $!,00 $,000 $%,000

*ear # $0 $0 $10,000 $#,000

4P5 &"606.06 "3,017. "$,22.2% "%,7$1.32

1&*). If the projects are in*epen*ent of each other, which sho'l* e accepte*8 If they are 't'ally e9

If the projects are in*epen*ent of each other, projects -, !, an* sho'l* e accepte* eca'se they

positi:e I// an* 4P5 that is reater than the cost of capital.

If the projects are 't'ally e9cl'si:e an* only one can e accepte*, Project sho'l* e accepte* has the hihest I//, shortest payac tie, an* secon*&hihest 4P5, j'st ehin* project !.



yac approach (1 point).

Perio*

years

years

years

years

roject

oints).



*er of preference (2 points)

cl'si:e, which one is est8 E9plain why. (1 point)

a:e a

ca'se it



Electronics ;nliite* (E;)

+a)es

*ear 1 $10,000,000

*ear 2 $1#,000,000

*ear # $1#,000,000

*ear % $",((!,000

*ear $%,###,000ost of +a)es (0 of sa)es

+A xpenses 2#.0 of sa)es

/ax Rate %0

e +pecia)ie' 3uipment $00,000

et 4or5ing apita) 2! of sa)es

Intro'uctor6 expenses

*ear 1 $200,000

Life of e3uipment 6ears

2&a) Estiate the new pro*'ct<s cash flows (3 points)

*ear 0 1 2

+a)es $10,000,000 $1#,000,000

ost of +a)es $(,000,000 $!,"00,000

+A xpense $2,#0,000 $#,0,000

Depreciation $100,000 $100,000

Intro'uctor6 xpense $200,000

Income 7efore tax $1,#0,000 $2,0%,000

/ax $%0,000 $"1",000

et Income $"10,000 $1,22!,000

Operating as8 9)o $&10,000 $1,#2!,000

4or5ing apita) $2,!00,000 $#,10,000 $#,10,000

8ange in 4or5ing apita) -$2,!00,000 -$"10,000 $03uipment -$00,000

Total cash flows &"3,200,000 "100,000 "1,32#,000

2&) ss'in a 20 cost of capital, what is the pro*'ct=s net present :al'e8 >hat is its intern

ost -$#,200,000

9ree as8 9)o

*ear 1 $100,000

*ear 2 $1,#2!,000

*ear # $2,%&(,&10

*ear % $2,0(",21#*ear $1,(#","!!

ost of apita) 20

4et Present 5al'e "60$,72.16

I// 26.$$

E; sho'l* intro*'ce the new pro*'ct eca'se the 4P5 is positi:e an* the I// is reater than t4P5 eans that the project enerates a s'rpl's after all costs, incl'*in financin costs. The I20 cost of capital iplyin that the rate of ret'rn on the project is ore than the *esire* rate.



# %

$1#,000,000 $",((!,000 $%,###,000

$!,"00,000 $,200,200 $2,&&,"00

$#,0,000 $2,0#(,!% $1,01",2

$100,000 $100,000 $100,000

$2,0%,000 $1,##0,0 $(1%,&%

$"1",000 $#2,022 $2%,&!"

$1,22!,000 $!&",0## $#(",&(!

$1,#2!,000 $"&",0## $%(",&(! et income : 'epreciation

$2,#%0,0&0 $1,1(&,&10 $0

$1,1(&,&10 $1,1!0,1"0 $1,1(&,&10 4or5ing capita) recovere'

"2,%67,610 "2,07,213 "1,73,##

l rate of ret'rn8 ?ho'l* E; intro*'ce the new pro*'ct8 E9plain why8 (2 points).

e cost of capital. The positi:e// of 26.$$ is hiher than the



5al'e&**e* In*'stries, Inc. (5I)

3&a) >hat is the net present :al'e of this project (1 point)8

;resent <a)ue of as8 9)o $210,000

Initia) Investment -$110,000

4P5 "100,000

3&) @ow any shares of coon stoc 'st e iss'e*, an* at what price to raise the reA'ire* c

um7er of s8ares outstan'ing 10,000

=ar5et va)ue of s8ares $100

xisting va)ue of s8ares $1,000,000

;< $100,000

/ota) <a)ue $1,100,000

<a)ue per s8are $110

Amount to 7e raise' $110,000

um7er of s8ares to 7e issue' 1000

To raise the reA'ire* capital, 5I sho'l* iss'e 1000 shares of coon stoc at "110 each.

3&c) >hat is the effect, if any, of this new project on the :al'e of the stoc of e9istin sharehol*ers

The new project has increase* the :al'e of e9istin stoc fro "100 to "110 per share.



pital8 (1 point)

8 (1 point)



FIN 500 Assignment 4, due 08/21/11, 9:00 pm California ti

This assignment provides you an opportunity to practice estimating

budgeting projects (chapter 12), using the common approaches in c

(chapter 13) such as payback, internal rate of return and net present

project , using !cel functions such as irr() and npv() to calculate "

complete this assignment, students need to get familiar with course

and chapter 13'

%roblems in this assignment are chosen from arvard usiness *ch

apital %roject and are revised by the instructor' !is assignment s

indi#idual $or%& -our completed .ssignment / should be saved a!cel workbook file, i'e', '!ls file' The filename should begin assig

and first letter of your first name' 0or e!ample, if .llen *mith com

he should name this assignment as assign/*mith., save and submit

workbook file ('!ls file)' 10' of t!is assignment points $ill "e de

named or formatted as re*uired&

!ere are t!ree pro"lems in t!is assignment, ea(! pro"lem !as

1' rowth nterprise , "nc' (") has / million that it ccapital investment projects (., , , 4), which have cfollowing table'

a"le 1& Comparison of +roe(t Cas! Flo$s -. t!ousand d

+roe(t pe of

(as! flo$

ear 0 ear 1

.' "nvestment 51,

#evenue 21,

6peratinge!pense

11,

' "nvestment 51,

#evenue 17,



e!pense,

' "nvestment 51,

#evenue 1,

6perating

e!pense

7,777

4' "nvestment 51,

#evenue 3,

6peratinge!pense

17,777

• .ll revenues and operating e!penses can be considered cash item

ach of these projects is considered to be of e;uivalent risk' Tto <ero on a straight5line basis for ta! purpose' For simpli(it,

13a/' alculate %ayback of each project and rank the four projec based on payback approach (1 point)'

13"/' alculate "## of each project and rank the four projects i based on "## (2 points)'

13(/' .ssuming a 1= discount rate, calculate the $%& of the fo projects in order of preference (2 points)

13d/' "f the projects are independent of each other, which shouldmutually e!clusive, which one is best> !plain why' (1 point)

int? -ou need to estimate the free cash flows (00) to the firmrate) B depreciation A ross fi!ed asset e!penditure A change in



e otal points 14

cash flow for capital

pital budgeting

value in choosing

# and $%&' To

content in chapter 12

ol+s ase on &aluing!ould "e done as an

d submitted as an/, then your last name

letes this assignment,

it as an !cel

du(ted if it)s not

e#eral *uestions&

an invest in any or all of thesh flows as shown in the

llars/

ear 2 ear

18,



,

11, 3,

/,99: 17,777

1, 7,

7,777 2,222

'

e investment will be deprecit!e depre(iation per ear f

ts in order of preference

order of preference

ur projects and rank the

be accepted> "f they are

first, 00 @ "T(1 Ata!net operating working



2' lectronics Cnlimited (C)was considering the introduction of a new prohad 7 years of life and was e!pected to generate sales in -ear 1 through 7following?

-ear 1 -ear 2 -ear 3 -ear /

1,, 13,, 13,, 9,DD8,

$o material levels of revenues or e!penses associated with the new producte!pected after five years of sales' ased on past e!perience, cost of sales for

product was e!pected to be D= of total annual sales revenue during each yelife cycle' *elling, general and administrative e!penses were e!pected to be 2total annual sales' Ta!es on profits generated by the new product would be pa

/= rate'

To launch the new product, C would have to incur immediate cash outlaystypes' 0irst, it would have to invest 7, in speciali<ed new productione;uipment' This capital investment would be fully depreciated on a straight5liover the five5year anticipated life of the new product' There would be no salvvalue left for the e;uipment at the end of its depreciable life' $o further fi!ede!penditures were re;uired after the initial purchase of e;uipment'

*econd, additional investment in net working capital to support sales would been made' C generally re;uired 28 cents of net working capital to support

dollar of sales' That is, change in net working capital is 28= of change in sal practical matter, the buildup of working capital would have to be made at the beginning of the sales year in ;uestion (or, e;uivalently, by the end of the preyear)' 0or e!ample, *ales in year 2 were e!pected to be 13, thousand, 3

0inally, C e!pected to incur ta!5deductible introductory e!penses of 2,

first year of the new product+s sales' *uch cost would not be recurring over t product+s life cycle' .ppro!imately 9, had already been spent developtesting marketing the new product'

23a/ estimate the new product+s cash flows' ( points)

23"/ .ssuming a 2= cost of capital, what is the product+s net present value>



points)'

$ote? !cept for the change in net working capital, which must be made bef



3' -ou are the 6 of &alue5.dded "ndustries, "nc' (&.")' -our firm has 1shares of common stock outstanding, and the current price of the stock isshare' The firm does not have any debt' -ou discover an opportunity in a

project that produces positive net cash flows with a present value of 21-our total initial costs for investing and developing this project are only -ou will raise the necessary capital for this investment by issuing new e;

potential buyers of your common stock will be fully aware of the project+and cost, and are willing to pay Ffair valueG for the new share of &." costock'

3a/ Ehat is the net present value of this project (1 point)>

3"/ ow many shares of common stock must be issued, and at what price tore;uired capital> (1 point)' int? the stock price should reflect the value creathe investment opportunity'

3(/ Ehat is the effect, if any, of this new project on the value of the stock of

HBS Valued Project Case Study

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