Project Description
Orange Computers has transformed into one of the largest smartphone companies in the world. Based on recent changes to the federal tax code, building phones in the US has become more attractive. Orange wants to build a single factory in either Pennsylvania, Texas, or North Carolina. Each state is offering incentives to woo Orange. Pennsylvania and North Carolina propose that Orange build a new facility, while Texas is offering grants to help Orange renovate a recently closed factory.
Build a workbook to calculate the weighted average cost of capital (WACC), net present value (NPV) and internal rate of return (IRR) for each location over ten years using the information provided. Determine where Orange should locate their factory and give a brief explanation of why.
Below are the pieces of information necessary to calculate the WACC, NPV, and IRR:
1. The factories in Pennsylvania and North Carolina could produce and sell 20 million phones annually, while the Texas factory could produce and sell 12 million.
2. Orange can sell all the phones produced at an average of $400 per phone in Year 11. Orange forecasts that they can gradually raise the price of their phones by 2% per year over the next 10 years.
1 Assume upfront investments in land, factory, and equipment are made in Year 0.
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3. A new factory would be 5 million square feet at a cost of $160/ft to build in Pennsylvania or North Carolina. After grants, Orange would only need to pay $125/ft to renovate the existing 3 million square foot factory in Texas.
4. North Carolina will lease publicly owned land for the factory to Orange tax free, but the local government won’t waive the 1% annual property tax which is calculated on the initial cost of the factory. The land in Pennsylvania will cost $20 million, and with the local property tax of 0.5%, property tax in Pennsylvania is calculated based on the initial cost of the factory plus the cost of the land. Since there is an existing factory in Texas, there will be no cost for purchasing the land, and the state has agreed to pay the local property tax for 10 years.
5. Orange plans to spend $500 million on equipment for the new factories in North Carolina or Pennsylvania. Texas is offering to help pay for the equipment which lowers the cost to $300 million, but it has added a caveat that forces Orange to sell the equipment to the state when Orange disposes of the equipment after 10 years.
The estimated proceeds on the sale of the equipment is presented in the template
for each location. Note, do not use “proceeds on equipment sale” as “salvage value”
when calculating depreciation. Use the “proceeds on equipment sale” in calculating
the gain or loss on the equipment sale.
6. Orange can depreciate 100% of the cost of equipment when it’s put into service for
tax purposes2 or it can depreciate the equipment on a straight-line basis with a
useful life of 10 years. Factory cost must be depreciated over 15 years on a
straight-line basis. There is no salvage value to consider for either the equipment or
the factory. Also recall that there is no depreciation on land.
7. The federal income tax rate for Orange is 21%. In their pursuit of new
manufacturing jobs, all three states have offered different incentive packages that
result in a state income tax equivalent to 3% for the first 10 years. State income
tax is deductible when calculating federal taxes.
8. Orange plans on hiring 8,000 workers in Pennsylvania or North Carolina with a total
annual expense of $80,000 per worker. The factory in Texas would require 5,000
workers at $90,000 per year. Wage inflation is forecasted to be 5% per year in
North Carolina, 4% in Pennsylvania, and 3% in Texas.
9. For operational expenses, assume that fixed overhead will be 10% of annual sales
and cost of goods sold will be 60% of annual sales at each factory. Labor costs will
be calculated separately using the inputs applicable for each location, (note number
8 information above). Orange will also need to maintain a total of 10% of next
2 According to the US tax law passed a few years ago, companies can choose to depreciate 100% of the equipment cost in the year it is
put into service.
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year’s sales in working capital. In other words, this is the cash that Orange will
have to reserve for this project. It cannot be used elsewhere in the company. 3
10. Orange keeps a stable debt-to-equity ratio of 0.8 and will use the same mix of debt
and equity to finance this project. The average interest rate on its debt is only 3%,
but its required rate of return on equity is 35%. Your calculation for WACC must be
presented in cell B32. Note that interest expense is not included in operating
income as the interest rate will impact the WACC. Including interest expense in
calculating operating income will double-count the effect of interest on the project.
Also, note that interest expense is considered a non-operating expense and hence
would not be included in calculating operating income.
Learning Outcomes
When completed successfully, this project will enable you to:
● Use your knowledge of costs of capital and capital budgeting to project financial
outcomes and choose how to allocate resources between competing projects.
Assignment Requirements
● The main component of this case study is the workbook you prepare with the
provided information to calculate WACC, NPV, and IRR. Begin by downloading this
template. (Note: after opening the link, click “make a copy” to begin working on
your own copy of the template. When you save this copy, please title it with
“Member Name 1, Member Name 2, etc-Finance Project”. Populate the workbook
including the first tab, entitled “Cover Page”.)
● Once you’ve completed your workbook, complete the sentence in the “Conclusion”
box (on the “TX” sheet) with the correct response, as well as a brief rationale for
why you chose your answer.
● Be sure the grader can see the underlying formulas when they click on cells that
contain calculations. Do not save these as values! In other words, use the
worksheet formula function to perform the calculation within the cells. We want you
to use the workbook effectively, therefore do not hardcode amounts, but link to
applicable cells. It is important to perform the calculations in the applicable cells,
see grading rubric.
● To submit your project, please click on the “Submit Project” button on your
dashboard and follow the steps provided in the Google Form. If you are submitting
your Finance project as a group, please ensure only ONE member submits on
3 The case template has been pre-populated with the required formulas to capture working capital movements from one year to
another, do not override them. Note that working capital is released at the end of the project life (in year 10). Cash is being reserved in
years 0 to 9 and in year 10, it is released for the company to be able to use it for a different purpose or project.
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behalf of the group. You will also be prompted to upload the final page of your
Group Project Agreement, which must be completed and signed by all group
members. Please reach out to [email protected] if you have any questions.
● Project grading typically takes about 3-4 weeks after the submission due date.
There is no score penalty for projects submitted after the due date, however
grading and feedback may be delayed.
Tips & Resources
● Make sure to go through our Cost of Capital: Capital Structure, Capital Budgeting,
and Excel for Finance courses before starting this project—these will help you
prepare your workbook.
● Don’t forget—Quantic students have access to Microsoft Office Online, including an
online version of Excel. Follow these instructions to access it.
● If you have any questions, be sure to reach out to [email protected] for help!
Plagiarism Policy
Quantic takes academic integrity very seriously—we define plagiarism as: “Knowingly
representing the work of others as one’s own, engaging in any acts of plagiarism, or
referencing the works of others without appropriate citation.” This includes both misusing
or not using proper citations for the works referenced and submitting someone else’s work
as your own. Quantic monitors all submissions for instances of plagiarism and all
plagiarism, even unintentional, is considered a conduct violation. If you’re still not sure
about what constitutes plagiarism, check out this two-minute presentation by our librarian,
Kristina. It is important to be conscientious when citing your sources.
When in doubt, cite! Kristina outlines the basics of best citation practices in this oneminute video. You can also find more about our plagiarism policy here.
Frequently Asked Questions
Below are answers to some of the common questions asked about the Finance project.
Is there a prerequisite course for this project?
We strongly recommend reviewing the Excel for Finance course before starting this
project—this will help you complete most of the required calculations in the template
provided with this case.
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How do I calculate the weighted average cost of capital (WACC)?
All the data required to calculate WACC is provided in the template. Refer to the Capital
Structure and WACC lesson to help you complete the calculation.
Should we use the excel NPV formula or calculate NPV by summing all the
present values?
Either method will work. If you’re using Excel NPV formula, remember you should only
apply it to the cash flows occurring from 1st period, then add the period 0 cash flow to
your NPV value. So, the Excel formula would be
=CF0+NPV(rate,CF1:CFn,…)
Alternatively, you can just calculate present values for all cash flows and sum them up. Be
sure to point to the cell containing the discount rate instead of typing in a rounded value
in the NPV formula, to ensure all decimals are appropriately captured in your calculation.
How is the working capital (reserved) returned formula set up in the template?
As you may recall from your accounting coursework, any project will require a certain
amount of working capital (current assets – current liabilities) to get an operation off the
ground and then sustain it through time. For year 0, it’s estimated that 10% of the year 1
sales will be required. However, from year 1 onwards, the working capital requirement is
only 10% of the incremental sales from one year to the next. These amounts are reflected
as negative numbers to denote that cash is being reserved. At the end of the project’s life,
(year 10), the funds reserved during the life of the project are then available for general
use by the company, hence they are summed up and reflected as a cash inflow, (a
positive number), in year 10, “working capital returned”. The worksheet template contains
the formulas necessary for these calculations, do not override them.
Are we to assume that Orange builds out the infrastructure in Year 0 and
begins selling in Year 1?
Consider the construction, acquisition, upfront investment in the factory and equipment
occur in year 0. The factory and equipment are then used, (“put in service”), starting with
year 1. Depreciation and property taxes should only be applied when operations
(production and sales) begin.
Should I use bonus depreciation or straight-line depreciation for the equipment
cost?
You must use the method that will maximize the value to the company. Note that bonus
depreciation only applies to the equipment and not the factory.
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How do I apply straight-line depreciation method?
You must apply the applicable useful life to the factory and equipment cost as depreciation
expense for each of the years during the project life. Keep in mind that there is no salvage
value for the factory or the equipment when calculating depreciation.
Similar to the sale of the equipment, should we consider a sale of the factory in
year 10?
No, you are only provided information about the sale of the equipment.
Corporate Finance Project Rubric
Scores 2 and above are considered passing. A project grade of a 1 or 0 will not receive
credit for the assignment. Students must revise and resubmit to receive a passing grade.
Score
Description
5
●
●
●
●
Clearly addresses the case study prompts.
Workbook is complete, accurate, and intelligible.
Workbook has no more than 1 minor error*.
Workbook has no major* errors.
4
● Clearly addresses the case study prompts.
● Workbook is complete and intelligible.
● Workbook has no more than 1 major* error or 3 minor errors*.
3
● Clearly addresses the case study prompts.
● Workbook is complete and intelligible.
● Workbook has no more than 2 major* errors or 6 minor errors* or
combination as shown in the chart below.
2
● Clearly addresses the case study prompts.
● Workbook is complete and intelligible.
● Workbook has no more than 3 major* errors or 9 minor errors* or
combination as shown in the chart below.
1
● Barely addresses the case study prompts.
● Workbook is missing many pieces of information and riddled with
errors.
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● Calculations do not show underlying formulas, making it impossible to
troubleshoot errors.
● Rationale is missing.
0
● The assignment is plagiarized, not turned in, or completely off topic.
*The following list provides examples of minor and major errors.
●
Minor errors include, but are not limited to:
o Assuming book value for factory/land when no information is provided in the
case prompts.
o Incorrect equipment depreciation method selected to maximize value, (i.e.
straight-line versus bonus depreciation).
o Incorrect signs for positive and negative cash flows.
o Missing or incorrect equipment sale value.
o Missing or incorrect Federal and State tax calculations.
o Incorrect depreciation calculations.
o Incorrect tax rate applied for property tax calculations.
o Incorrect time bucketing of revenue and relevant costs (upfront vs.
operating).
●
Major errors include, but are not limited to:
o Calculated cells are not displaying formulas to help with troubleshooting.
o Incorrect decision criterion applied for location selection.
o Incorrect WACC calculation.
o Incorrect discount rate applied for present value calculations.
o Incorrect cash flow range selected for IRR calculations.
o Incorrect NPV calculation.
o Complete omission of required calculations.
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Highest grade with # of errors
Minor ↓ Major →
0
1
2
3
4+
0
5
4
3
2
1
1
5
4
3
2
1
2
4
3
2
1
1
3
4
3
2
1
1
4
3
2
1
1
1
5
3
2
1
1
1
6
3
2
1
1
1
7
2
1
1
1
1
8
2
1
1
1
1
9
2
1
1
1
1
10+
1
1
1
1
1
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