Analysis of Proposed Laptop Manufacturing Plant by Dell

MANAGERIAL FINANCE
STUDENT ID:
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1

Executive Summary
The primary aim of this report is to present an analysis of the proposed laptop manufacturing
plant which Dell is intending to build on the existing land. Based on the information provided,
the capital budgeting tools and techniques have been deployed which clearly highlight that the
project is feasible. Further, this project is also successful in meeting the additional requirement
provided the interest rates do not exceed 22.62% p.a. However, going forward the company
needs to be ensure that the cost of capital of each internal project is reflective of the intrinsic risk
involved. Also, the company should rethink the additional requirement introduced and thereby
should be flexible regarding the same.
Introduction
The objective of the given report is to analyse a new laptop manufacturing facility that Dell is
planning to set up. In this regards, the requisite techniques of capital budgeting have been
deployed in order to comment on the feasibility of the project. Further, the given project has also
been analysed in the wake of the company policy whereby the project inflows should serve the
debt repayments or else the project would not be funded. Finally, discussion regarding this
additional requirement is carried out along with decision of the company to use the same cost of
capital for all internal projects irrespective of their respective risk.
Analysis
The requisite analysis of the proposed project is carried out below in the wake of the information
provided.
Question 1
The requisite queries with regards to the proposed project are answered as shown below.
PART A
The annual depreciation for the project over the useful life of ten years has been computed
below.

Explanation:
 Opening depreciable value (Year 1) = Initial investment – Residual value = 500 million –
150 million = $ 150 million
 Opening depreciable value (Year n) = Closing depreciable value (Year n-1)
 Depreciation expense = Opening depreciable value * 10%
 Closing depreciable value = Opening depreciable value – Depreciation
 Depreciation in last year (i.e. year 10) is computed considering the remaining depreciable
value so that all the requisite depreciation is charged.
PART B
The yearly cash flows associated with the plant from year 1 to year 9 are indicated below.