BUS-F301 Financial Management – Case Study 2

QUESTION

BUS-F301 Financial
Management

Fall 2015, Class No. 20179 (Online)/
20623 (Face-to-Face)

Case
Study 2: Cashflow Estimation and Capital Budgeting (Chapters 9 & 10) Total
Points

Total Points =160 points; Due
by Sunday November 15, 11:59 p.m. (ET); Submit to Assignments on Canvas.

Please read the Case
Study – Assessment Rubric which had been re- posted to Modules >
Weekly Lessonson CanvasforWeek
Eleven (Week of November 2)before
you work on this case study.Your case report (including the answers to
the questions and the summary of the case background) should be well-typed
using MS Office 2013 – Word and should be submitted to the corresponding
tab under Assignments on Canvas by the deadline. All your work
must be submitted in a single MS Word file. Up to 25% of the case study
possible points (i.e. 40 points) will be deducted if you submit your work
otherwise. An embedded Excel file in your MS Word file will be considered the
same as a separate Excel file submitted. So, if you embed an Excel file in your
MS Word file, the same penalty will be given.All
the answers as well as the case background summary, except theformulas,
must be in your own words. Copy and paste sentence(s)/paragraph(s) from any
source, except your own source, is totally unacceptable. Answers submitted in
such a way will be subject to heavy penalty.
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For this case study, please study the Minicase of Chapter
10 on Pages 348 and 349 of the textbook (can be accessed from the eBook
tab on McGraw-Hill Connect) and the answers to the questions of the
minicase (already posted to Modules > Weekly Lessons on Canvas
forWeek
Eleven (Weekof November 2).

The minicase is a VERY CLOSE example for this Case Study
2 Please print the minicase from eBookon McGraw-Hill Connectand
its solution from Modules > Weekly Lessonson Canvasand study
them well before you work on this case study.
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Requirements: You have to provide
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(i)
a brief summary (must be 350 words or more)(10 points) of the case background
description (in your own words) of this case study in the next page and

(ii)
the answer (in your own words) to each attached question.

You should write up the summary before you work on the answer to any
of the questions in this case study.

For the summary, I expect you to write in your own words
summarizing what are presented in the case study. I want to make sure that you
understand everything in this case study and what you are asked to do about it.
Only when you understand what are presented and what you are asked to do, then
you can do well. Right?

I do
not require you to mention anything about your findings (that is, your answers
to the questions) in your summary. You are not expected to add anything new
(such as your opinions, explanations etc.) to your summary. I just want to see
whether you understand the case study and whether you understand the
requirements or not. Therefore, you are expected to restate or summarize in
your own words (350 words or more) the background description of this case
study including what you are asked to do about it only.In
your summary, you need to coverthe
information contained in the paragraphs there (about Hoosier Camper, Inc.), the
information contained in the questions and what you are asked to do by the questions.
Thank
you!

Please be reminded that in
order to get the full points for the questions, you need to provide the correct
answers, with relevant working (calculation(s) and explanation(s) etc.).
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Hoosier
Camper, Inc. is a manufacturer of truck campers. Its current line of truck
campers are selling excellently. However, in order to cope with the foreseeable
competition with other similar truck campers, HC spent $950,000 to develop a
new line of deluxe truck campers that are more spacious. In addition, the
deluxe truck campers are much lighter with LED lighting, aerodynamic front
nose-cap, a one-piece fiberglass wet bath, expansive storage in the cab and
some other high-end features. The company had also spent a further $250,000 to
study the marketability of this new model.

HC is able to produce the new model at
a variable cost of $4,750 each. The total fixed costs for the operation are
expected to be $2,850,000 per year. HC expects to sell 20,000 campers, 25,000
campers, 18,000 campus, 16,500 campers and 12,500 campers of the new deluxe
model per year over the next five years respectively. They will be selling at a
price of $18,000 each. To launch this new line of production, HC needs to
invest $500,000,000 in equipment which will be depreciated on a seven-year
MACRS schedule. The value of the used equipment is expected to be worth
$1,250,000 as at the end of the 5 year project life.

HC
is planning to stop producing the existing model entirely in two years. Should
HC not introduce the new deluxe model, sales per year of the existing model
will be 12,000 campers and 10,000 campers for the next two years respectively.
The existing model can be produced at variable costs of $ 3,260 each and total
fixed costs of $1,450,000 per year. They are selling for $ 14,500 each. If HC
produces the new deluxe model, sales of the existing model will be eroded by
5,000 campers for next year and 6,000 campers for the year after next. In
addition, to promote sales of the existing model alongside with the new deluxe
model, HC has to reduce the price of the existing model to $11,000 each. Net
working capital for the new deluxe model will be 15 percent of sales and will
vary with the occurrence of the cash flows. As such, there will be no initial
NWC required. The first change in NWC is expected to occur in year 1 according
to the sales of the year. HC is currently in the tax bracket of 35 percent and
it requires a 14 percent returns on all of its projects.

You
have just been hired by HC as a financial consultant to advise them on this new
deluxe truck camper project. You are expected to provide answers to the
following questions to their management by their next meeting which is scheduled
sometime next month.

1.
What is/are the sunk cost(s) for this new
deluxe truck camper project? Briefly explain. You have to tell what sunk cost
is and the amount of the total sunk cost(s). In addition, you have to advise HC
on how to handle such cost(s).(5 points)
2.
What are the cash flows of the project for
each year?(95 points)
3. What is the payback period of the project? Should it
be accepted if RC requires a payback of 4 years for all projects?(10 points)
4.
What
is the PI (profitability index) of the project?(10
points)

5.
What is the IRR (internal rate of return) of
the project?(10 points)
6.
What is the NPV (net present value) of the
project?(10 points)
7.
Should
the project be accepted based on PI, IRR and NPV? Briefly explain.(10
points)

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Important Reminder
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“If you choose to turn
in a late case study, you will lose 25% of the points for each day past-due for
that case study. Penalty will be given immediately after the deadline. As I
need to return the case studies and post the answers to the case studies, no
case study will be accepted for grading after 4 days past-due” -4-
day penalty rule. It is your own responsibility to make
sure
that you do turn in the case studies and submit the right case study files when
you turn them in. You are required to save frequently at least one backup copy
of your case studies before you submit them. Past-due submission because of
computer crash, misplacing of your memory stick (jump drive) or failing to
submit the correct file by the deadline will be penalized according to the
above-mentioned 4-day penalty rule.

After
you have made your submission of the individual case studies, you should see a
short message immediately under Assignments telling whether you have
submitted your work successfully or not. It is your responsibility to make sure
that you have turned in your right work filessuccessfully before
you leave the Assignmentswebpage. If you fail to do so, yoursubsequent
submission will be subject to the 4-day penalty rule mentioned above.
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Case Study 2 – Description and Requirements

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