ACC 560 Week 8 Case 4 Greetings Inc Capital Budgeting Course_Answer

ACC 560 Week 8 Case 4 Greetings Inc Capital Budgeting Course_Answer

ACC 560 Week 8 Case 4 Greetings Inc Capital Budgeting Course_Answer

ACC 560 Week 8 Case 4 Greetings Inc Capital Budgeting Course_Answer

ACC 560 Week 8 Case 4 Greetings Inc Capital Budgeting Course_Answer

ACC 560 Week 8 Case 4 Greetings Inc Capital Budgeting Course_Answer

ACC 560 Week 8 Case 4 Greetings Inc. Capital Budgeting Course

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.

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 Decor management and (b) a suggestion on how Greetings stores could use the computer connection for related sales.

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