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Corporate Finance

Capital Budgetin” rel=”nofollow”>ing – Case Study
As she headed toward her boss’s office, Sara James, chief operatin” rel=”nofollow”>ing officer for the Alpha Corporation—a computer services firm that specialized in” rel=”nofollow”>in airborne support—wished she could remember more of
her train” rel=”nofollow”>in in” rel=”nofollow”>ing in” rel=”nofollow”>in fin” rel=”nofollow”>inancial management that she had been exposed to in” rel=”nofollow”>in college. Sara had just completed the followin” rel=”nofollow”>ing tasks:
• Analyzin” rel=”nofollow”>ing the fin” rel=”nofollow”>inancial statements of its nearest competitor and their own performance. She was not quite pleased with their performance. The competitor was performin” rel=”nofollow”>ing much better.
• Summarizin” rel=”nofollow”>ing the fin” rel=”nofollow”>inancial aspects of four capital in” rel=”nofollow”>investment projects that were open to Alpha-Corp durin” rel=”nofollow”>ing the comin” rel=”nofollow”>ing year, and she was faced with the task of recommendin” rel=”nofollow”>ing which should be
selected.
Sara had to explain” rel=”nofollow”>in their fin” rel=”nofollow”>inancial performance in” rel=”nofollow”>in the previous year and convin” rel=”nofollow”>ince her boss to agree on in” rel=”nofollow”>investin” rel=”nofollow”>ing in” rel=”nofollow”>in a project for future growth.
What concerned her was the knowledge that her boss, Sandra Jones, a “street smart” chief executive, with no background in” rel=”nofollow”>in fin” rel=”nofollow”>inancial theory, would immediately favor the project that promised the
highest gain” rel=”nofollow”>in in” rel=”nofollow”>in reported net in” rel=”nofollow”>income. Sara knew that selectin” rel=”nofollow”>ing projects purely on that basis would be in” rel=”nofollow”>incorrect; but she wasn’t sure of her ability to convin” rel=”nofollow”>ince Sandra, who tended to assume
fin” rel=”nofollow”>inanciers thought up fancy methods just to show how smart they were.
As she prepared to enter Sandra’s office, Sara pulled her summary sheets from her briefcase and quickly reviewed the details of the four projects, all of which she considered to be equally risky
and therefore used 10% as the min” rel=”nofollow”>inimum acceptable rate of return. The company uses a straight-lin” rel=”nofollow”>ine method for calculatin” rel=”nofollow”>ing depreciation and the company’s tax rate is 33%.
Proposal –A:
This proposal is to add a jet to the company’s fleet. The plane was only six years old and was considered a good buy at $300,000. In return, the plane would brin” rel=”nofollow”>ing over $600,000 in” rel=”nofollow”>in additional
revenue durin” rel=”nofollow”>ing the next five years with only about $56,000 in” rel=”nofollow”>in operatin” rel=”nofollow”>ing costs.

YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial in” rel=”nofollow”>investment (300,000)
Additional Revenue 43,000 76,800 112,300 225,000 168,750
Additional operatin” rel=”nofollow”>ing costs 11,250 11,250 11,250 11,250 11,250
Depreciation 60,000 60,000 60,000 60,000 60,000
Proposal –B:
This proposal is to diversify in” rel=”nofollow”>into copy machin” rel=”nofollow”>ines. The new busin” rel=”nofollow”>iness was expected to generate over $1.4 million in” rel=”nofollow”>in sales over the next five years.

YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial in” rel=”nofollow”>investment (700,000)
Additional Revenue 87,500 175,000 262,500 393,750 525,000
Additional operatin” rel=”nofollow”>ing costs 26,250 26,250 26,250 26,250 26,250
Depreciation 17,500 17,500 17,500 17,500 17,500

Proposal—C:
This proposal is to buy a helicopter. The machin” rel=”nofollow”>ine was expensive and, countin” rel=”nofollow”>ing additional train” rel=”nofollow”>in in” rel=”nofollow”>ing and licensin” rel=”nofollow”>ing requirements, would cost $40,000 a year to operate. However, the versatility that the
helicopter was expected to provide would generate over $1.5 million in” rel=”nofollow”>in additional revenue, and it would give the company access to a wider market as well.

YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial in” rel=”nofollow”>investment (800,000)
Additional Revenue 100,000 200,000 300,000 450,000 600,000
Additional operatin” rel=”nofollow”>ing costs 40,000 40,000 40,000 40,000 40,000
Depreciation 160,000 160,000 160,000 160,000 160,000

Proposal – D:
This proposal is to begin” rel=”nofollow”>in operatin” rel=”nofollow”>ing a fleet of trucks. Ten could be bought for only $51,000 each, and the additional busin” rel=”nofollow”>iness would brin” rel=”nofollow”>ing in” rel=”nofollow”>in almost $700,000 in” rel=”nofollow”>in new sales in” rel=”nofollow”>in the first two years
alone.

YR-0 YR-1 YR-2 YR-3 YR-4 YR-5
Initial in” rel=”nofollow”>investment (510,000)
Additional Revenue 382,500 325,125 89,250 76,500 51,000
Additional operatin” rel=”nofollow”>ing costs 31,000 31,000 31,000 31,000 31,000
Depreciation 102,000 102,000 102,000 102,000 102,000

In her min” rel=”nofollow”>ind, Sara quickly went over the evaluation methods she had used in” rel=”nofollow”>in the past: payback, in” rel=”nofollow”>internal rate of return, and net present value. Sara herself favored the net present value method, but
she had always had a tough time gettin” rel=”nofollow”>ing Sandra to understand it.
One additional constrain” rel=”nofollow”>int that Sara had to deal with was Sandra’s in” rel=”nofollow”>insistence that no outside fin” rel=”nofollow”>inancin” rel=”nofollow”>ing be used this year. Sandra was worried that the company was growin” rel=”nofollow”>ing too fast and had piled up
enough debt for the time bein” rel=”nofollow”>ing. She was also again” rel=”nofollow”>inst a stock issue for fear of dilutin” rel=”nofollow”>ing earnin” rel=”nofollow”>ings and her control over the firm. As a result of Sandra’s prohibition of outside fin” rel=”nofollow”>inancin” rel=”nofollow”>ing, the size of
the capital budget this year was limited to $800,000, which meant that only one of the four projects under consideration could be chosen. Sara wasn’t too happy about that, either, but she had
decided to accept it for now, and concentrate on selectin” rel=”nofollow”>ing the best of the four.
As she closed her briefcase and walked toward Sandra’s door, Sara remin” rel=”nofollow”>inded herself to have patience; Sandra might not trust fin” rel=”nofollow”>inancial analysis, but she would listen to sensible arguments. Sara only
hoped her fin” rel=”nofollow”>inancial analysis sounded sensible!
Income Statements for the year ended Dec 31, 2XXX
(All in” rel=”nofollow”>in ‘000)
Gamma corporation Alpha Corporation
Sales $ 985,000 $ 560,000
Less: Cost of sales 650,000 397,000
Gross profit 335,000 163,000
Less: Sellin” rel=”nofollow”>ing and Admin” rel=”nofollow”>in. Expenses 124,000 75,000
EBIT 211,000 88,000
Less: Interest 35,000 10,000
EBT 176,000 78,000
Less: Taxes 58,000 25,000
EAT 118,000 53,000

Balance Sheets as at Dec 31, XXX
ASSETS
Current Assets $ $ $ $
Cash 50,000 45,000
A/Receivable 170,000 395,000
Inventory 155,000 140,000
Total Current assets 375,000 580,000
Fixed Assets 765,000 410,000
Total assets 1,140,000 990,000
LIABILITIES
Current Liabilities
A/Payable 235,000 300,000
Other payables 130,000 125,000
Total Current Liabilities 365,000 425,000
Long term Debt 220,000 70,000
Total Liabilities 585,000 495,000
SHAREHOLDERS’ EQUITY
Common Stock 450,000 440,000
Retain” rel=”nofollow”>ined Earnin” rel=”nofollow”>ings 105,000 55,000
Total Shareholders’ Equity 555,000 495,000
Total Liab. & Sh. Equity 1,140,000 990,000
Part A:
(You can use MS-Excel to do the ratios)

Analyze the fin” rel=”nofollow”>inancial statements of both Alpha & Gamma Corporations on the four key areas:
1. Liquidity
2. Asset Utilization
3. Debt Utilization
4. Profitability

A detailed analysis is expected in” rel=”nofollow”>in each of these four areas with suggestions for improvement.

Part B:
You will use MS-Excel to do the calculations in” rel=”nofollow”>in this case.
(Use a different worksheet for each of these proposals – Ex: Sheet 1 – Proposal A; Sheet 2 – Proposal B)

1. Calculate the Cash flows for each of the proposals.
2. Calculate the followin” rel=”nofollow”>ing for each of the proposals in” rel=”nofollow”>in the case
a. Payback period
b. Net Present value (NPV)
c. Internal rate of return (IRR)
d. What would happen if operatin” rel=”nofollow”>ing cost were 10% higher than expected?
e. What would happen if operatin” rel=”nofollow”>ing costs were 10% lower than expected?

3. You will write a short report to Sandra Jones, Chief executive officer of Alpha Company.
a. Your report should in” rel=”nofollow”>include your complete fin” rel=”nofollow”>inancial analysis
b. Recommendation as to which proposal should be adopted and the reasons for your recommendation in” rel=”nofollow”>in order to address her concerns and convin” rel=”nofollow”>ince her of your choice.

Sample Solution

Cerebrum in a Vat Theory by Hilary Putnam | Analysis Distributed: 23rd March, 2015 Last Edited: fifth January, 2018 Disclaimer: This paper has been put together by an understudy. This isn’t a case of the work composed by our expert paper essayists. You can see tests of our expert work here. Any suppositions, discoveries, conclusions or proposals communicated in this material are those of the writers and don’t really mirror the perspectives of UK Essays. In Hilary Putnam’s Brain-in-a-vat (BIV) illustration, a world exists in which brains, a neuroscientist, a supercomputer running recreations of brains contained in a vat, and the vat itself are the main articles. These things have either dependably existed or showed up totally arbitrarily with every thing in a similar state (i.e. PCs running recreations, brains are in vats, and so on.) Understanding this, envision the accompanying situation: You are the shrewd researcher who screens BIV’s and the encounters they get from the PCs. You guarantee that all the BIV’s associated trust they are carrying on with a useful life in Springfield, Illinois. One of your BIV’s is code-named “The Chancellor.” After some time passes, the Chancellor for all intents and purposes expresses the expression “I know I am only a mind in-a-vat,” which he accepts to be valid, and after that proceeds with his modified capacities. The BIV situation Putnam presents is one such contention placing the distrustful theory. Much like the Descartes’ Evil Genius, the incredulous theory calls into question one’s information of the outside world. While the Evil Genius depends on a preeminent deluding divinity, Putnam’s BIV contemplates the impacts of a distraught researcher utilizing PCs to instigate fanciful observations and encounters. Customary doubters fight we can’t observe the BIV speculation as false; if we somehow managed to allow the BIV premises as obvious, at that point our encounters would seem just they by and by do (Stanford 2009). Thusly, doubters keep up that we do not have the capacity to know anything about the world outer to us. Putnam applies his semantic externalism and thusly considers the situation with the Chancellor incomprehensible. Semantic externalism is a type of externalism where “implications and truth states of one’s sentences, and the substance of one’s deliberate mental states, rely on the character of one’s outside, causal condition” (Stanford 2009). All the more correctly, he centers his worry to the primary individual sentence, “I am a mind in-a-vat” to show that an occurrence in which the Chancellor verbally articulated said state is essentially false. Subsequently, Putnam reasons that we mustn’t be BIVs. I will contend that Putnam abuses the meaning of “vat” in his cerebrum in-a-vat analyze, in this way diminishing his probability of refuting the incredulous theory. In this exposition, I will characterize semantic externalism, trailed by Putnam’s utilization of it against three distinctive BIV situations. If we somehow managed to acknowledge semantic externalism, at that point we would essentially recognize that how we characterize a term isn’t the sole factor in choosing what the word intends to us. A typical case would be the examination of a well-known substance (e.g. water) and how its significance would stay consistent even before experiencing it. All the more accurately, the individuals who cling to semantic externalism would see “water” as a term attributed to a substance with a compound arrangement of H2O before researchers had recognized the atoms including it; be that as it may, the piece of this substance we had marked “water” did, to some degree, add to our importance (DeRose 102). For Putnam, association with things on the planet speaks to the outer factor. For instance, consider two individuals who have the same mental states and afterward begin collaborating with substances which are cosmetically comparable while still made out of various particles. Maybe one individual interfaces solely with Ag (silver), and alternate connects just with ABC, yet both take in “silver” to allude to every one of their particular substances. Accordingly, every individual would have the same mental states (wants, convictions, volitions, and so on.), yet with varying in what they reference; “silver” would mean Ag for one, and ABC for the other. With the end goal for Putnam to interface semantic externalism to his BIV explore, he starts by taking note of that it is important to recognize that any explanation of the sentence “I am a mind in-a-vat” gives off an impression of being self-negating. All the more definitely, if we somehow happened to keep up this sentence to be valid, the sentence would at present determine a false conclusion since we couldn’t state “I am a cerebrum in-a-vat” and realize that I am in such a state. Take for instance the announcement “[t]here is no positive explanation.” If you see this announcement as evident, it would need to be false in light of the fact that it is a distinct proclamation. On the off chance that you set the announcement to be false, at that point the appropriate response is still false. To show how this identifies with Putnam’s BIV’s, first accept that we really exist in the substantial world (T) similarly as generally held, rather than in vats (case T, where T is the Tangible world.) We have the accompanying: (T1) If I live in a Tangible world, I am not a “Cerebrum in-a-vat.” (T2) In example T, I live in an unmistakable world. (TC) I am not a “Cerebrum in-a-vat” (True)(T1, T2) I am not a BIV. (TC) Next, consider we are presently the brains in the vats an alternate example (case BIV). In this occasion BIV, a perplexing registering framework persistently bolsters us wonderful encounters. Along these lines, we now have the confounded processing framework sending us signals for us to develop our encounters. Presently we have an alternate issue in occasion BIV: (BIV1)If I am a genuine BIV, a PC is sending me marvelous encounters. (BIV2) I am a genuine BIV. (BIV3)A PC is sending me marvelous encounters. (BIV1, BIV2) (BIV4)If I express “I am a BIV”, I am a cerebrum in-a-vat. (False, BIV3) (BIVC) “I am not a cerebrum in-a-vat” (True) (BIV1, BIV2, BIV3, BIV4) Along these lines, “I am not a cerebrum in-a-vat” (BIVC) To clear up, semantic externalism suggests that the subject will never communicate with the Tangible vats on the planet. Thus, when the Chancellor emphasizes “vat,” he doesn’t mean unmistakable vats, however rather the beginning of these electric driving forces. All the more absolutely, when he says “vat” he implies counterfeit vats since he really interfaced with a PC program. On the off chance that the Chancellor was alluding to a cerebrum in the example BIV, that mind would allude to the electrical driving forces sent from the PC as simulated vats. Along these lines, we touch base at the accompanying situation: (BIV1) “I am a cerebrum in-a-vat” (False); (BIV1) suggests (BIV2) “I am not a cerebrum in-a-vat” (True) (BIV1, BIV2) suggests we are not brains in vats. Subsequently, the thought that “I am a mind in-a-vat” gives off an impression of being a self-invalidating as indicated by Putnam. After Putnam trusts he has built up this self-invalidation, he should frame a bland (i.e. all around material) contention (U). Thus, the accompanying occurrence:>

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