Capital Budgeting Case Study

资本预算案例代写
Instructions: The assignment is based on the case below. The instructions relating to the assignment are at the end of the case.
Ramiro and Sema are about to make a decision that is very important for the future of their business. They evaluated some financial scenarios, the two software programmers now think that it’s time to make a final decision on their forecasted cash flows and decide on their next move. They have two alternative projects and they need to decide one of the projects to undertake.
Both friends have advanced level training/education in programing and both worked for leading companies in the sector for many years. With their years of savings, now they decide to pursue their dreams and start their own company. They have been working on a program that would speed up the processing time in computer programs. The speed will increase by about 25%. At the moment, the software is complete. They think that the software could be improved in different industries, but any delay in starting their own company and entering the market may be very costly. Any other programmer or big competitor may also develop the same software, which will take away from the two friends an advantage of being the first mover to the market. They both are “do it now” people and against any further delay to enter the market.
Ramiro and Sema are going to spend $1,000,000 on plant, equipment and suppliers. Being a new company and not having a network of customers will make their business risky during the first year, so they decide to keep the prices very low in the first year. They will offer very cheap prices in the first year and their cash flows will be low. Once, they have a place in the market and have market recognition, the price can be increased. They expect that they will only be able to make sales for 5 years, thinking that in 5 years the technology will change too much and their software will lose its attractiveness. But they expect that they can sell the company (sell the patent of the software) to another company, which then can incorporate their software into their own products. Accordingly, the two friends estimate the cash flows for the next 5 years on this project (call it Project A) as follows:

Year
Project A
Expected Cash flows ($)

0
(1,000,000)

1
50,000

2
200,000

3
600,000

4
1,000,000

5
1,500,000

An alternative to pursuing this project would be to immediately sell the patent for their innovative software design to one of the established software makers. They estimated that they would receive around $200,000 for this. It would probably not be reasonable to expect much more as neither their product nor their innovative approach had a track record.

They could then invest in some plant and equipment that would test silicon wafers for zircon content before the wafers were used to make chips. Too much zircon would affect the long-term performance of the chips. The task of checking the level of zircon was currently being performed by chip makers themselves. However, many of them, especially the smaller ones, did not have the capacity to permit 100% checking. Most tested only a sample of the wafers they received.
Ramiro and Sema were confident that they could persuade at least some of the chip makers to outsource this function to them. By exclusively specializing in this task, their little company would be able to slash costs by more than half, and thus allow the chip manufacturers to go in for 100% quality check for roughly the same cost as what they were incurring for a partial quality check today. The life of this project too (call it project B) is expected to be only about five years.
The initial investment for this project is estimated at $ 1,100,000. After taking into account the sale of their patent, the net investment would be $900,000. As for the future, Ramiro and Sema were pretty sure that there would be sizable profits in the first couple of years. But thereafter, the zircon content problem would slowly start to disappear with advancing technology in the wafer industry. Keeping all this in mind, they estimate the cash flows for this project as follows:

Year
Project B
Expected Cash flows ($)

0
($900,000)

1
650,000

2
650,000

3
550,000

4
300,000

5
100,000

Ramiro and Sema now need to make their decision. For purposes of analysis, they plan to use a required rate of return of 20% for both projects. Ideally, they would prefer that the project they choose have a payback period of less than 3.5 years and a discounted payback period of less than 4 years.
Below are the results of the analysis they have carried out so far: (you need to recalculate these results)

Metrics
Project A
Project B

Payback period (in years)
3.15
1.38

Discounted payback period (in years)
3.98
1.79

Net Present Value (NPV)
$612,847
$596,206

Internal Rate of Return (IRR)
35.93%
55.07%

Profitability Index
1.61
1.66

Please be sure to validate the results above. One of the concerns that Ramiro and Sema have is regarding the reliability of their cash flow estimates. All the analysis in the table above is based on “expected” cash flows. However, they are both aware that actual future cash flows may be higher or lower.
Assignment:
Suppose that Ramiro and Sema have hired you as a consultant to help them make the decision. Please draft an official max 4-page and min 2-page memo to them with your analysis and recommendations.
Your submission should cover the following questions:
Briefly, summarize the key facts of the case and identify the problem being faced by ourtwo budding entrepreneurs. In other words, what is the decision that they need tomake?
What are some approaches that can be used to solve this problem? What are some various criteria or metrics that can be used to help make thisdecision?
An excellent paper will propose solutions that are sensitive to all the identified issues.
a) Rank the projects based on each of the following metrics: Payback period, Discounted payback period, NPV, IRR, ProfitabilityIndex.
b) Sema believes that the best approach to make the decision is the NPV approach. However, Ramiro is not so sure that ignoring the other metrics is a good idea. Which of the approaches or metrics would you propose? In other words, would you prefer one or more of these approaches over the others? Explain why.
An excellent paper includes an evaluation of solutions containing thorough and insightful explanations, feasibility of solutions, and impacts of solutions.
a) Which of these projects would you recommend? Explainwhy.
b) Briefly state the limitations of the approach you used in making this decision, and outline what further analysis you wouldrecommend.
An excellent paper provides concise yet thorough action-oriented recommendations using appropriate subject-matter justifications related to the problem while addressing limitations of the solution and outlining recommended futureanalysis.

Lastly, you will prepare a presentation (max 3-4 minutes, max 3 slides) and give your analysis and results in class.

The initial cost of each project given above outline is $1M for project A and $1.1M for project B. This is just for your references. Your analysis will be done using the initial costs given below. For each student, a different initial cost is given. Make your analysis based on the initial cost given table below.
The initial cost table for each student:

Student ID
The initial cost of project A
The initial cost of project B

988214
$ 1,872,974
$ 1,239,868

987722
$ 1,135,903
$ 1,042,389

987750
$ 1,266,346
$ 1,270,193

987766
$ 1,480,423
$ 1,328,179

987767
$ 1,164,531
$ 1,580,251

987768
$ 1,476,473
$ 2,100,398

987779
$ 1,260,191
$ 1,324,487

987783
$ 1,737,019
$ 1,316,000

987786
$ 1,637,190
$ 1,520,049

987814
$ 1,697,200
$ 1,111,011

987829
$ 1,923,905
$ 1,146,706

987896
$ 1,609,459
$ 1,907,445

987914
$ 1,727,662
$ 2,095,638

987950
$ 1,463,852
$ 1,089,763

987964
$ 1,863,657
$ 2,041,153

987972
$ 1,414,857
$ 1,890,629

987976
$ 1,371,045
$ 2,170,151

988001
$ 1,534,267
$ 1,616,264

988002
$ 1,156,957
$ 1,788,154

988074
$ 1,015,485
$ 1,075,669

988137
$ 1,248,861
$ 1,057,286

988150
$ 1,430,528
$ 1,355,894

988159
$ 1,446,699
$ 1,186,850

988165
$ 1,226,710
$ 1,876,041

988177
$ 818,628
$ 1,469,253

987777
$ 1,141,289
$ 1,894,635

987798
$ 1,377,844
$ 1,823,207

987806
$ 1,650,631
$ 1,893,736

987833
$ 817,704
$ 1,574,982

987975
$ 912,127
$ 1,544,855

987998
$ 1,063,463
$ 1,859,046

988000
$ 1,237,074
$ 1,552,313

952722
$ 1,646,439
$ 1,701,327

988046
$ 806,030
$ 1,056,390

988051
$ 1,153,451
$ 1,808,626

988125
$ 1,400,882
$ 1,234,227

988131
$ 702,258
$ 1,969,558

988136
$ 1,859,023
$ 1,600,253

988161
$ 1,715,326
$ 2,113,064

952880
$ 1,252,393
$ 1,653,554

$ 904,408

$ 1,622,366

$ 938,334

$ 1,604,057

$ 1,811,118

$ 1,614,452

$ 1,726,247

$ 2,174,888

$ 1,580,697

$ 1,130,119

$ 1,323,266

$ 1,509,311

$ 1,765,507

$ 1,376,281

$ 1,938,271

$ 1,842,230

If your student ID is not in the list, choose a set of initial cost from the bottom of the table (grey cells)