Shrieves Casting Company Capital Budgeting and Risk Analysis Project

This project analyzes a capital budgeting scenario for Shrieves Casting Company, focusing on the addition of a new product line. It involves calculating Net Present Value (NPV) and conducting sensitivity analysis to assess the impact of changes in key variables like the cost of capital, unit sales, and net working capital. The analysis includes detailed financial projections, depreciation schedules, and tax considerations. The project explores the effect of optimistic and pessimistic scenarios on the project's profitability, providing insights into the risks and potential rewards of the investment. Furthermore, the project utilizes the replacement chain method for comparing projects with different lifespans. The document is designed to help students understand financial decision-making and risk assessment in capital budgeting.

Running head: BUSINESS CASE STUDIES 2
Business Case Studies 2
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Table of Contents
1. Spreadsheet financial analysis of the two proposed options:......................................................2
2. Memo:..........................................................................................................................................6
Selected methods for evaluation of two alternatives:..................................................................6
Inputs and assumptions:...............................................................................................................7
Summary of findings:..................................................................................................................8
Recommendations and follow-up measures:...............................................................................9
References:....................................................................................................................................10

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1. Spreadsheet financial analysis of the two proposed options:
Base case:

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Optimistic case:

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Pessimistic case:

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2. Memo:
Memo
To: The CEO, DuoLever Limited
From: The Manager
Date: 17th May 2019
Subject: Assessment of the two provided alternatives
The main purpose of this memo is to assist the management of DuoLever Limited in
undertaking the project selection decision of the two provided alternatives. At present, issues are
confronted by the firm as to whether include new production or obtaining the license for using
the patented method. Hence, it is crucial to evaluate all possible aspects for making the ultimate
decision.
Selected methods for evaluation of two alternatives:
For conducting the feasibility analysis of the two proposed options, the techniques used
constitute of yearly cash flows and net present value (NPV) computations. A firm often faces
certain issues when it comes to retaining working level of the employees or receiving materials

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from suppliers, if they do not repay the amounts timely despite the fact that they have adequate
amount of profit disclosed in its financial reports (Bekaert and Hodrick 2017). Moreover, if the
organisation is not able to fill orders, rumours might be created and as a result, the brand image
of the company would be hampered in its operating market. Therefore, cash flow position is
crucial to be evaluated before any investment decision is undertaken (Ehrhardt and Brigham
2016).
On the contrary, NPV is deemed to be another technique of analysing different
investments because priority is provided to time value of money. Along with this, the method
takes into account before-tax as well as after-tax cash flows while adequately considering profit
level and risk position of the firm (Finkler, Smith and Calabrese 2018). Furthermore, it is
possible to increase the value of the firm with the help of NPV.
Inputs and assumptions:
In case of the first alternative, DuoLever is required investing in plant and equipment for
$20 million. The useful life of the asset is 5 years and it is expected that the project would not
have any residual amount after its completion. For this alternative, there is inclusion of certain
assumptions. The revenue is anticipated to increase in the second year by 4% coupled with
anticipated increase of 2% because of the recycled packaging benefit. For financing the
particular equipment, DuoLever has to seek bank loan that would lead to payment of interest
amounting to $1.4 per annum. Moreover, it is possible to minimise energy costs with the help of
eco-friendly materials. As a result, there would be fall in total variable packaging costs by 15%
currently valued at $22 million in the initial project year. Although further decline of the same by
10% is possible through avoidance of the supplier margin, it could not be considered by
DuoLever. The reason includes that it has to incur for a new partner, which would offset this

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particular decline. Hence, the costs would remain the same, as per the initial anticipations.
Depreciation cost is subtracted from revenue so that it is possible to arrive at profit after tax.
However, the same is added back with profit after tax that has assisted in the ascertainment of net
yearly cash flows.
For the second alternative, there is no need for DuoLever to invest in any plant and
equipment. This is because the use of the patented method would be licensed only from Clean
World Limited. Hence, DuoLever does not have to incur any form of initial outlay at the
beginning of the project (Fracassi 2016). It has to spend only the material supply costs and other
operating expenses, which are lower as well compared to the first option. It is noteworthy to
mention that there is no production required for this option and thus, no production cost would
be borne by the organisation. On the other hand, this option would enjoy the similar sales
benefits, as in the case of the first option. Lastly, it is estimated that the tax rate of both options
would be 25% with estimated WACC of 8%.
Summary of findings:
The above tables are prepared mainly for showing the expected cash flows generated per
annum as well as the net present value of the two provided alternatives for DuoLever Limited.
The second alternative is observed to provide more profitability than the first alternative because
of increased cash flows. The higher cash flows for the second option are mainly due to no initial
outlay and depreciation charge and there is lower operating cost as well.
Moreover, due to the absence of any investment in asset in the second option, DuoLever
does not need to pay interest cost owing to the absence of bank loan obtained to finance the
investment (Karadag 2015). In terms of NPV of the two proposed options, the same outcome is
obtained, as in the case of the first option. The NPV for the first option is computed as $584.81

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million, while the NPV for the second option is obtained as $584.81 million. Thus, the second
option would be more valuable for DuoLever Limited, since it could generate more profit from
this option (Pandey 2015).
Recommendations and follow-up measures:
From the results obtained and analysed in the above section, DuoLever Limited could
reap more benefits, if it selects the second option in terms of profitability. On the other hand, the
project is subject to various uncertainties as well (Patel 2014). Therefore, sensitivity analysis is
conducted by considering optimistic case and pessimistic case. The assumptions made include
the following:
 2% increase in expected sales growth for optimistic case and 2% decline in expected
sales growth for pessimistic case
 2% increase in additional sales growth and no further sales growth due to no recycled
packaging benefit
 The variable cost reduction would be 20% for optimistic case and 10% for pessimistic
case
Despite making all such assumptions, the project is still deemed to be favourable for the
organisation, as it would yield positive income (Vernimmen et al. 2014). Therefore, it needs to
be selected by DuoLever for maximising its profit level.

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References:
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University
Press.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Finkler, S.A., Smith, D.L. and Calabrese, T.D., 2018. Financial management for public, health,
and not-for-profit organizations. CQ Press.
Fracassi, C., 2016. Corporate finance policies and social networks. Management Science, 63(8),
pp.2420-2438.
Karadag, H., 2015. Financial management challenges in small and medium-sized enterprises: A
strategic management approach. EMAJ: Emerging Markets Journal, 5(1), pp.26-40.
Pandey, I.M., 2015. Essentials of Financial Management, 4th Edtion. Vikas publishing house.
Patel, B., 2014. Fundamentals of financial management. Vikas Publishing House.
Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y. and Salvi, A., 2014. Corporate finance:
theory and practice. John Wiley & Sons.