Study the scenarios given below and choose one to review and analyze. Find out the proposal’s suitability and economic viability. For all situations, suppose spending occurs on first day of each year and benefits or savings occurs on last day. Suppose discount rate or weighted average cost of capital is 10%. Avoid taxes and depreciation.
Proposal A: New Equipment
A company wishes to purchase labor-saving piece of equipment. By using NPV method of capital budgeting, find out proposal’s suitability and economic viability with information given below:
i) Labor content= 12% of sales, which are annually $10 million.
ii) New equipment will save 20% of labor annually.
iii) New equipment will last 5 years.
iii) New equipment will cost= $200,000.
Create 500-word report describing your computations and conclusions. Reply the question given below in your report:
i) Describe effect of the higher or lower cost of capital on the firm’s long-term financial decisions.
ii) Examine the use of capital budgeting techniques in strategic financial management.