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FIN316 Capital Budgeting Case FINAL

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Capital Budgeting Case
Su Guan
Fin316
4:00 PM
11/13/2014

Directions:
Answer questions 1 – 6 and turn in a hard copy of your answers at the beginning of class on Thursday November 13th. No late submissions will be accepted.
You will need to use Excel or Google sheets for most of the analysis. Please type answers to the questions in this word document and attach each spreadsheet as exhibits at the back.
I am trying to replicate an exam experience as much as possible so I will not be answering individual questions by email about the case before it is due. However, I will answer any clarifying questions in class on Tuesday so everyone can hear the answers together.You may work alone or with one or two other people. The maximum group …show more content…

For (i), (ii) and (iii), report the new variable costs line for the project and the resulting NPV in each case. How much does NPV change in each case? (10 points total)

(i) If the variable costs to be 52%, the new variable cost line is
Variable cost 2,207,425 2,428,168 2,777,823.6 3,055,606
NPV=343,693
(ii) If the variable costs to be 55%, the new variable cost line is Variable cost 2,207,425 2,428,168 2,938,082.7 3,231,891 NPV=176,777 (iii) If the variable costs to be 60%, the new variable cost line is Variable cost 2,207,425 2,428,168 3,205,181 3,525,699 NPV=(101,416)

3) Suppose Mr. Kuklinski is 100% certain that gas prices are going to increase making variable costs 55% in years 3 & 4 (as in question 2), but has the opportunity to buy an insurance policy for $300,000, payable in year 1, that would guarantee that variable costs would remain at 50% for all four years. You can consider the cost of the policy to be a fixed expense. Is this something you would recommend to him? Why or why not? (5 points)

If variable costs 55% in years 3 & 4,
NPV= 176,777
If fixed expense were 600,000 in year 1 and variable costs would remain at 50% for all four years,
NPV= 274,414
Because the NPV of purchasing an insurance policy is greater, we recommend that he should buy an insurance policy.

4) What if the $300,000 insurance policy described in

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