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Assignment 6

Accounting

Assignment 6.5                                                                                                  
  Mini-Case Study: Capital Budgeting with Fresnel Lenses                                                                                            
                                                                                                       
    Fresnel Enterprises, Inc. is embarking on a new venture with a partner manufacturing company China.  Fresnel has designed a new line of screen guards for smartphones that not only protect screens, but also act as a magnifying glass.  They expect the new screen guards to be particularly popular with retirees in the United States, so are already planning a marketing campaign targeting the Florida and Arizona markets.                                                                              
      Design Costs, Already Incurred to Date $150,000   Note the red herring here.  This is a sunk cost and should not be considered.                                                    
      Initial Cost of Equipment $675,000   Rather than asking students to do depreciation calculations this number is just given.                                                  
      Annual Depreciation on Equipment $135,000   The assignment states assets will be fully depreciated.  This is given as after-tax for astute students who realize the selling price of the equipment above book value would be taxable.                            
                      After-Tax Salvage Value of Equipment Year 5 $65,000                                                                        
    However, while Fresnel can manage design, marketing, and distribution in the United States, they have little manufacturing expertise.  So they have hired a contract manufacturer in China to handle actual production.  Fresnel will supply the initial investment dollars needed to set up the production and assembly lines in China, and then pay their partner a modest fee for each unit produced. Since they are handling distribution, there will also be some working capital investments required.   Annual Selling and Adminstrative Expenses $95,000                                                                        
                                                                                 
      Production Costs (% of Sales)     35%                                                                        
      Working Capital Investment (% of Sales) 25%                                                                        
      Effective Tax Rate (% of Taxable Income) 21%                                                                        
                                                                                                 
    Fresnel is planning a 5-year time horizon for this project.  At the end of year 5, the company will liquidate the assets from the project.  All assets will have been fully depreciated.  A list of facts and assumptions, including sales forecasts for the life of the project, are given in the tables to the right.  =======>   Required Return (%)       12%                                                                        
                                                                                       
                                                                                       
                                                                                       
                      Sales Projections                                                                                
    Provide a financial analysis of this project to help determine if it should be pursued:   Year One $250,000                                                                              
    a) Using the information provided, create simple income statements for each year of the project.  Calculate the annual Operating Income (EBIT) and Net Income.   Year Two $650,000                                                                              
      Year Three $850,000                                                                              
    b) Create an analysis of the Working Capital needs and changes for each year (see the table at the top of page 263 of the textbook for an example).   Year Four $800,000                                                                              
      Year Five $450,000                                                                              
    c) Determine the Free Cash Flow for each year of the project.                                                                                      
    d) Calculate the project's NPV, BCR, and IRR.                                                                                      
    e) Based on your analysis, very briefly explain whether this project should be pursued and why.                                                                                      
    Create your Original Solution Below - Be sure to show all calculations, to carefully complete all parts of the assignment, and to clearly indicate answers (create additional worksheets to organize your work if necessary).

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