Greetings,_Inc._-_Capital_Budgeting

Mary E. Jones 2/27/2011 ACC 560 Week 8: Case 4 Greetings Inc: Capital Budgeting 1. Calculate the net present value using the numbers provided. Assume that annual cash flows occur at the end of the year. Initial investment $800,000 Estimated useful life 5 years Estimated salvage value -0- Estimated annual cash flows Annual cash flow savings for Wall Décor $175,000 Annual additional store cash flow from increased sales 100,000 Sale of ink and paper supplies 10,000 Net annual cash flow $285,000 Present Value at 12% Discount factor for 5 periods 3.60478 Present value of net cash flows $$285,000 X 3.60478 $1,027,362 12% Present value of net cash flows $1,027,362 Capital investment 800,000 Net present value $ 227,362 2. Mr. Burns is concerned that the original estimates may be too optimistic. He has suggested that you do a sensitivity analysis assuming all costs are 10% higher than expected and that all inflows are 10% less than expected. Initial investment $880,000 Estimated useful life 5 years Estimated salvage value -0- Estimated annual cash flows Annual cash flow savings for Wall Décor $157,500 Annual additional store cash flow from increased sales 90,000 Sale of ink and paper supplies 9,000 Net annual cash flow $256,500 Present Value at 12% Discount factor for 5 periods 3.60478 Present value of net cash flows $$256,500 X 3.60478 $924,626 12% Present value of net cash flows $ 924,626 Capital investment 880,000 Net present value $ 44,626 3. Identify possible flaws in the numbers or assumptions used in the analysis, and identify the risk(s) associated with purchasing the equipment. One risk would be with the prices of equipment going up and the cash flows going down the company risks losing $182,736. 4. In a one-page memo, provide a recommendation based on the above analysis. Include in this memo: (a) a challenge to store and Wall Décor management and (b) a suggestion on how Greetings stores could use the computer connection for related sales. |     MEMO   To:         Greetings Inc. and Wall Décor management   From:     Mary E. Jones   Re:         Recommendation based on above analysis