Loyola University SCPS Finance 371 Midterm Exam: Part 1 Analysis

This assignment solution addresses a finance midterm exam from Loyola University of Chicago's SCPS Finance 371 course. The assignment requires the identification of errors in a Capital Expenditure Request (CER) and accompanying Excel spreadsheets related to a capital investment decision. The solution meticulously identifies ten key mistakes in the original CER and spreadsheet calculations, covering areas like operating profit presentation, depreciation handling, discount rate application (WACC vs. borrowing cost), and the calculation of discounted cash flow, payback periods, and internal rate of return. The provided solution includes a corrected Excel spreadsheet and a revised CER write-up reflecting the accurate calculations, ensuring financial metrics are correctly computed using the weighted average cost of capital (WACC) and proper accounting for depreciation. Furthermore, the solution presents detailed financial information, including machine costs, output calculations, and profit margins, all adjusted to reflect the corrected data.

Error found in the Excel file and the Capital Expenditure Request (CER) are as follows –
(1) It is given in the CER that as As a result of the investment in this machine, the company
will achieve total operating profits of approximately $4.6 million per year. However, the
amount shall be mentioned in absolute value. It shall be written as - As a result of the
investment in this machine, the company will achieve total operating profits of $45,90,000
per year.
(2) It is mentioned that depreciation expenses has been included in calculating operating
profits. However, it shall be written as - Depreciation expense will be deducted from the
operating profit to arrive at the figure for cash flow before tax. However, the amount of
depreciation shall be added back to cash flow after tax to arrive at the figure of free cash flow
as depreciation is the non-cash expenses.
(3) Cash flows have been discounted using the borrowing cost of 8.5%. However, the cash
flows shall have been discounted using the rate of weighted average cost of capital that is
11.5%.
(4) It is mentioned that borrowing cost is more representative as the company will be charged
with on go-forward basis. However, weighted average cost of capital shall be used as it will
provide better idea regarding whether the internal rate of return of the company is more or
less than the cost of capital of the company.
(5) Discounted cash flow is given as $21,67,000 per year. However, the discounted cash flow
per will be as follows as the discount rate will be 11.5% and not 8.5%.

(6) Discounted cash flow, life of project is given as $ 27,335,000. However, the amount will
be $152,87,773. Difference is there as the discount rate will be 11.5% and not 8.5%.
(7) Discount Rate given as 8.5%. It will be 11.5% as WACC is used for discounting the cash
flows.
(8) Simple payback given as 0.84 years, it will be 0.80 years as changes shown in excel sheet
(9) Discounted payback given as 1.28 years, it will be 0.90 years as changes shown in excel
sheet
(10) Internal Rate of Return given as 102.11%, it will be 124.29% as changes shown in excel
sheet