Financial Viability Analysis for Fluffy Cupcake Company and Brownie Cake Company

FINACIAL MANAGEMENT COURSE – ACCT 702_001 W 18
Name of the student
Name of the University

Author Note

Table of Contents
Part A: Financial Viability for Fluffy Cupcake Company (FCC)......................................................................................................................................................................4
Part B: Financial Viability for Brownie Cake Company (BCC)........................................................................................................................................................................ 5
Part C: Sensitivity Analysis........................................................................................................................................................................................................................... 6
Part D: Purchase vs Lease Analysis............................................................................................................................................................................................................... 9
Bibliography............................................................................................................................................................................................................................................... 11

Part A: Financial Viability for Fluffy Cupcake Company (FCC)
According to the given information, the Fluffy Cupcake Company (FCC) is intended to purchase a machine for business improvement purpose. However, they will go
for purchase provided the purchase is financially viable. Thus, to understand whether the purchase decision is financially viable or not, first of all free cash flow for
firm (FCFF) has been calculated using the information provided. Subsequently, net present value technique has been applied as capital budgeting decision.
According to the calculation as shown in the below figure, the NPV of this project would be $14672.67. Since its positive, it can be said that the purchase decision will
be financially viable.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Cost of Machine $42,000.00
Incremental Cash
Revenue $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00 $23,000.00
Operating Expenses $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00
Earnings before
interest and taxes
(EBIT) $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00 $5,000.00
Tax 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%
Depreciation $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00 $4,200.00
Free Cash Flow For
The Firm (FCFF) $7,700.00 $7,700.00 $7,700.00 $7,700.00 $7,700.00 $7,700.00 $7,700.00 $7,700.00 $7,700.00 $7,700.00
Cost of capital 6%
Discounting Factor
0.9433962
3
0.8899964
4
0.8396192
8
0.7920936
6
0.7472581
7
0.7049605
4
0.6650571
1
0.6274123
7
0.5918984
6
0.5583947
8
Present Value of
FCFF $7,264.15 $6,852.97 $6,465.07 $6,099.12 $5,753.89 $5,428.20 $5,120.94 $4,831.08 $4,557.62 $4,299.64
Total Present Value $56,672.67
Net Present Value $14,672.67