JWI 530: Financial Management I Assignment 2
Assignment 2: Cost-Benefit Analysis
Parts A and B Due Sunday, Midnight of Week 10 (25% of Final Grade)
Overview
In this assignment, you will take on the role of a senior member of the finance team assigned to lead the
investment committee of a health care equipment manufacturer. Your team is evaluating a make-versus-buy
decision that has the potential to improve the companys competitiveness, but which requires a significant
capital investment in new equipment. The assignment is organized into two parts:
Part A: Data calculations based on the information in the scenarios
Part B: Recommendations based on the calculations
Opportunity Details
The new equipment would allow your company to manufacture a critical component in-house instead of buying
it from a supplier. This capability would help you stabilize your supply chain (which has suffered from some
irregularities and quality issues in the past). It could also have a positive impact on profitability through the
absorption of fixed costs since this new machine will have plenty of excess capacity. There may even be a
possibility that the company could leverage this capability to create a new external revenue stream by providing
services to other companies.
The company has been growing steadily over the past 5 years, and the financials and future prospects look
good. Your CEO has asked you to run the numbers. After doing some digging into the business, you have
gathered information on the following:
The estimated purchase price for the equipment required to move the operation in-house would be
$700,000. Additional net working capital to support production (in the form of cash used in Inventory,
AR net of AP) would be needed in the amount of $30,000 per year starting in year 0 and through all
years of the project to support production as raw materials will be required in year o and all years to
run the new equipment and produce components to replace those purchased from the vendor.
The current spending on this component (i.e., annual spend pool) is $1,500,000. The estimated
cash flow savings of bringing the process in-house is 16.67% or annual savings of $250,000. This
includes the additional labor and overhead costs required.
Finally, the equipment required is anticipated to have a somewhat short useful life, as a new wave of
technology is on the horizon. Therefore, it is anticipated that the equipment will be sold after the end
of the project (the last year of generated cash flow) for $30,000. (i.e. the terminal value).
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JWI 530 Assignment 2 (1222)
Page 1 of 5
JWI 530: Financial Management I
Assignment 2
Input from Stakeholders
As part of your research, you have sought input from a number of stakeholders. Each has raised important
points to consider in your analysis and recommendation. Some of the points and assumptions are purely
financial. Others touch on additional concerns and opportunities.
1. Angela, your colleague from Accounting, recommends using the base assumptions above: 5-year
project life, flat annual savings, and 10% discount rate. Angela does not feel the equipment will
have any terminal value due to advancements in technology.
2. Bob from Sales is convinced that this capability would create a new revenue stream that could
significantly offset operating expenses. He recommends savings that grow each year: 5-year
project life, 10% discount rate, and a 10% annual savings growth in years 2 through 5. In other
words, instead of assuming savings stay flat, assume that they will grow by 10%% in year 2, and
then grow another 10% over year 2 in year 3, and so on. Bob feels that the stated terminal value of
$30,000 is reasonable and used it in his calculations.
3. Carl from Engineering believes we use a higher Discount Rate because of the risk of this type of
project. As such, she is recommending a 5-year project life and flat annual savings. Carl suggests
that even though the equipment is brand new, the updated production process could have a
negative impact on other parts of the overall manufacturing costs. He argues that, while it is difficult
to quantify the potential negative impacts, to account for the risk, a 15% discount rate should be
used. Being an engineer, Carl feels that the stated terminal value is low based on his experience
and is recommending a $55,000 terminal value.
4. Delilah, the Product Manager, is convinced the new capability will allow better control of quality and
on-time delivery, and that it will last longer than 5 years. He recommends using a 7 Year Equipment
Life (which means a 7-year project and that savings will continue for 7 years), flat annual savings,
and 10% discount rate. In other words, assume that the machine will last 2 more years and deliver
2 more years of savings. Delilah also feels the equipment will have an estimated terminal value of
$20,000 at the end of its 7- year useful life as it will be utilized longer thus having less value at the
end of the project and savings.
5. Edward, the head of Operations, is concerned that instead of stabilizing the supply chain, it will just
add another process to be managed, and will distract from the core competencies the company
currently has. He feels the company should focus on improving communication and supply chain
management with its current vendor, and he feels confident he can negotiate a discount of 3% off
of the annual outsourcing cost of $1,500,000 if he lets it be known they are considering taking over
this step of the process. As there is little risk associated with Edwards proposal due to no upfront
capital requirements, a lower risk-free discount rate of 7% would be appropriate. Edward feels that
any price reductions from the current vendor will last for five years. (NOTE: because there is no
investment, the Payback and IRR metrics are not meaningful. Simply provide the NPV of the
Savings cash flows).
© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be
copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.
JWI 530 Assignment 2 (1222)
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JWI 530: Financial Management I
Assignment 2
PART A: Data Calculations
Using the data presented above (and ignoring the extraneous information), for this profit and supply
chain improvement project, calculate each of the following (where applicable):
Nominal Payback
Discounted Payback
Net Present Value
Internal Rate of Return
Scenario
Nominal
Payback
Discounted
Payback
N/A
N/A
Net Present
Value
Internal Rate of
Return
#1: Angela
#2: Bob
#3: Carl
#4: Delilah
#5: Edward
N/A
Submission Requirements
Present your calculations and results either in an Excel Spreadsheet or in Word (using tables and headers
to organize the information in a way that is clear and easy to read). Be sure to show your detailed
calculations. If you get something wrong, you may still be able to get partial credit.
© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be
copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.
JWI 530 Assignment 2 (1222)
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JWI 530: Financial Management I
Assignment 2
Part B: Recommendations
After completing the calculations for all scenarios, create a brief memo to the CEO outlining your
committees recommendations. You may organize the memo as you see fit, but it must include the following:
A clear opening statement of your recommendation for or against the project.
A brief synopsis of the processes and factors that led to your recommendations.
o
What information did you gather, and how did you get it?
o
From whom did you seek input, and why?
A summary of the strategic benefits and risks in pursuing (or not pursuing) this project, including:
o
Highlights of the main data points that support your position
o
Acknowledgement of the data points that oppose your argument
o
Identification of open/unresolved items
An identification of the scenario that, from a purely financial perspective, represents the most
accurate estimate of the anticipated results and your rationale as to why.
An identification of non-financial elements that need to be considered for the recommended
scenario.
Any assumptions in project economics can have a significant impact on the result. Identify 3 financial
elements/assumptions in your analysis that would make this project financially unattractive. Be as
transparent and candid with your BOD as possible. What would have to be true for this to be a bad
investment?
A summary restating your recommendation and key action items.
Submission Requirements
Your memo should be no more than 2 pages, single-spaced, using 10- or 12-point font.
Focus on the rationale for your recommendations. Include key numbers to support your
recommendations but do no re-present all your calculations.
© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be
copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.
JWI 530 Assignment 2 (1222)
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JWI 530: Financial Management I
Assignment 2
RUBRIC
25% of Course
Grade
Criteria
1. Correct answers
for the investment
recommendation
scenarios.
Weight: 25%
2. Showed work for
calculation for the
investment
recommendation
scenarios
Weight: 20%
3. Analyzed the
investment
opportunity
leveraging the
supplied data
sets, and
provided clear,
well-reasoned
recommendations
to the CEO.
Assignment 2, Parts A and B
Unsatisfactory
Low Pass
Pass
High Pass
Honors
Did not
demonstrate
understanding,
either by not
submitting, or by
calculating 8 or
fewer answers
correctly.
Partially
demonstrated
understanding by
calculating 9 to
10 answers
correctly.
Satisfactorily
demonstrated
understanding by
calculating 11 to
12 answers
correctly.
Demonstrated a
high level of
understanding by
calculating 13 to
14 answers
correctly.
Demonstrated
exemplary
understanding by
calculating 15 or
more answers
correctly.
Does not show
work and/or has
significant errors
and shortcomings
of process, order
and calculation of
metrics.
Incorrectly
demonstrates
process, order and
calculation and has
many errors.
Demonstrates
basic level of
understanding of
process, order and
calculation, but
may have some
errors.
Shows process,
order and
calculation that
mostly supports
generation of the
required metrics.
Fully and
completely
Completely shows
process, order
and calculation of
the required
metrics.
Did not submit, or
incompletely
analyzed the
investment options
and did not address
the key questions
or explain
recommendations.
Provided minimal,
basic analysis and
recommendations
addressing 3 or
fewer of the
required memo
components and
options.
Provided good
analysis and
recommendations
addressing at least
4 of the required
memo components
and options.
Provided excellent
analysis and
recommendations
addressing all
required memo
components and
all 5 options.
Provided exemplary
analysis and
recommendations
addressing all
required memo
components and all
5 options; included
additional insights
drawing on learning
from outside
sources and
demonstrating
excellent business
sense.
Written
communication does
not flow, and/or fails
to justify or express
Written
communication is
basic; fails to
clearly connect
conclusions and
assertions to data;
has several
mechanical errors
making parts of the
text difficult to
understand.
Written
communication
flows well but lacks
conciseness or
clarity in places;
assertions and
conclusions are
generally justified
and explained;
contains several
minor grammatical
errors.
Written
communication
flows well;
concisely and
clearly expresses
recommendations
in a manner that
rationally and
logically develops
the topics; there
are a few
mechanical errors.
Written
communication is
excellent; concisely
and clearly
expresses
recommendations
in an exemplary
manner that
rationally and
logically develops
the topics; free of
mechanical errors.
Weight: 45%
4. Professionally
communicated
with clear writing;
concise and free
of mechanical
errors.
Weight: 10%
recommendations;
multiple mechanical
errors; much of the
communication is
difficult to
understand.
© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be
copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University.
JWI 530 Assignment 2 (1222)
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