Bus475 V11project Planbus475 V11page 2 Of 2project Plan Templateproj ✓ Solved

BUS/475 v11 Project Plan BUS/475 v11 Project Plan Template Project Title: Project Objectives: · [List project objective] Operational Step Responsible Person Timeline · [List project objective] Operational Step Responsible Person Timeline · [List project objective] Operational Step Responsible Person Timeline Fresnel Case Assignment 6.5 Mini-Case Study: Capital Budgeting with Fresnel Lenses Fresnel Enterprises, Inc. is embarking on a new venture with a partner manufacturing company China. Fresnel has designed a new line of screen guards for smartphones that not only protect screens, but also act as a magnifying glass. They expect the new screen guards to be particularly popular with retirees in the United States, so are already planning a marketing campaign targeting the Florida and Arizona markets.

Design Costs, Already Incurred to Date 0,000 Note the red herring here. This is a sunk cost and should not be considered. Initial Cost of Equipment 5,000 Rather than asking students to do depreciation calculations this number is just given. Annual Depreciation on Equipment 5,000 The assignment states assets will be fully depreciated. This is given as after-tax for astute students who realize the selling price of the equipment above book value would be taxable.

After-Tax Salvage Value of Equipment Year 5 ,000 However, while Fresnel can manage design, marketing, and distribution in the United States, they have little manufacturing expertise. So they have hired a contract manufacturer in China to handle actual production. Fresnel will supply the initial investment dollars needed to set up the production and assembly lines in China, and then pay their partner a modest fee for each unit produced. Since they are handling distribution, there will also be some working capital investments required. Annual Selling and Adminstrative Expenses ,000 Production Costs (% of Sales) 35% Working Capital Investment (% of Sales) 25% Effective Tax Rate (% of Taxable Income) 21% Fresnel is planning a 5-year time horizon for this project.

At the end of year 5, the company will liquidate the assets from the project. All assets will have been fully depreciated. A list of facts and assumptions, including sales forecasts for the life of the project, are given in the tables to the right. =======> Required Return (%) 12% Sales Projections Provide a financial analysis of this project to help determine if it should be pursued: Year One 0,000 a) Using the information provided, create simple income statements for each year of the project. Calculate the annual Operating Income (EBIT) and Net Income. Year Two 0,000 Year Three 0,000 b) Create an analysis of the Working Capital needs and changes for each year (see the table at the top of page 263 of the textbook for an example).

Year Four 0,000 Year Five 0,000 c) Determine the Free Cash Flow for each year of the project. d) Calculate the project's NPV, BCR, and IRR. e) Based on your analysis, very briefly explain whether this project should be pursued and why. Create your Original Solution Below - Be sure to show all calculations, to carefully complete all parts of the assignment, and to clearly indicate answers (create additional worksheets to organize your work if necessary). This is the Student Template, provided in the assignment instructions October 2019

Paper for above instructions

Project Plan for Fresnel Enterprises, Inc.

Project Title:

Launch of Innovative Smartphone Screen Guards

Project Objectives:

1. Market Penetration: Successfully launch the new line of smartphone screen guards within two major retiree markets (Florida and Arizona) by targeting appropriate demographics and establishing partnerships.
2. Production Readiness: Set up an efficient production line in China, ensuring quality and timely manufacturing delivery aligning with sales forecasts.
3. Financial Viability: Achieve profitability by maintaining a clear focus on cost-control initiatives while meeting the projected sales targets.
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Financial Analysis

A. Income Statement

We forecast the income statement for the project over five years.
| Year | Sales Revenue | Production Costs (35% of Sales) | SGA Expenses | EBIT | Taxes (21%) | Net Income |
|--------|---------------|---------------------------------|----------------|---------------|---------------|----------------|
| 1 | 0,000 | ,500 | ,000 | ,500 | ,175 | ,325 |
| 2 | 0,000 | 7,500 | ,000 | 7,500 | ,775 | 8,725 |
| 3 | 0,000 | 7,500 | ,000 | 7,500 | ,075 | 1,425 |
| 4 | 0,000 | 0,000 | ,000 | 5,000 | ,250 | 5,750 |
| 5 | 0,000 | 7,500 | ,000 | 7,500 | ,475 | 6,025 |

Calculation Explanations:

1. Production Costs: This is calculated as 35% of the sales revenue.
2. SGA Expenses: Fixed at ,000 annually.
3. EBIT: Sales revenue minus production costs and SGA expenses.
4. Taxes: Calculated as 21% of EBIT.
5. Net Income: EBIT minus taxes.

B. Working Capital Analysis

Working capital is calculated as a percentage of sales to determine the day-to-day operational funding required for the project.
| Year | Sales Revenue | Working Capital (25% of Sales) | Change in WC |
|--------|---------------|--------------------------------|--------------------|
| 1 | 0,000 | ,500 | ,500 |
| 2 | 0,000 | 2,500 | +0,000 |
| 3 | 0,000 | 2,500 | +,000 |
| 4 | 0,000 | 0,000 | -,500 |
| 5 | 0,000 | 2,500 | -,500 |

C. Free Cash Flow Calculation

Using the previously calculated values, free cash flow is determined as follows:
Free Cash Flow = Net Income + Depreciation - Change in Working Capital
| Year | Net Income | Depreciation | Change in WC | Free Cash Flow |
|--------|------------|--------------|--------------|------------------|
| 1 | ,325 | 5,000 | ,500 | 5,825 |
| 2 | 8,725 | 5,000 | 0,000 | 3,725 |
| 3 | 1,425 | 5,000 | ,000 | 6,425 |
| 4 | 5,750 | 5,000 | -,500 | 3,250 |
| 5 | 6,025 | 5,000 | -,500 | 9,525 |

D. NPV, BCR, and IRR Calculation

To calculate the Net Present Value (NPV) and Internal Rate of Return (IRR):
1. The formula for NPV is:
\[
NPV = \sum_{t=1}^{5} \frac{FCF_t}{(1+r)^t} - Initial\,Investment
\]
Where \( r \) is the required return (12%) and Initial Investment is 5,000.
- Year 1: \( \frac{125,825}{1.12^1} = 112,917.86 \)
- Year 2: \( \frac{293,725}{1.12^2} = 234,865.09 \)
- Year 3: \( \frac{446,425}{1.12^3} = 318,940.08 \)
- Year 4: \( \frac{483,250}{1.12^4} = 305,709.22 \)
- Year 5: \( \frac{379,525 + 65,000}{1.12^5} = 268,711.94 \)
NPV Calculation yields:
\[
NPV = (112,917.86 + 234,865.09 + 318,940.08 + 305,709.22 + 268,711.94) - 675,000 = 1,240,144.19 - 675,000 = 565,144.19
\]
NPV: 5,144.19.
2. Benefit-Cost Ratio (BCR) is calculated by:
\[
BCR = \frac{Total\,Discounted\,Benefits}{Total\,Discounted\,Costs}
\]
Where \( Discounted Benefits = NPV + Initial Investment \).
\[
BCR = \frac{1,240,144.19}{675,000} = 1.837
\]
BCR: 1.837.
3. IRR is approximately calculated using financial calculators or software and is found to be about 32%, indicating a strong return relative to the required return.

Conclusion

Based on the NPV of 5,144.19, a BCR of 1.837, and an IRR of around 32%, the project appears not only viable but also potentially profitable. Fresnel Enterprises should consider pursuing this project, given the positive financial indicators and the market potential in the targeted demographic.

References

1. Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
2. Ross, S. A., Westerfield, R. W., & Jaffe, J. (2015). Corporate Finance. McGraw-Hill Education.
3. Garrison, R. H., & Noreen, E. W. (2016). Managerial Accounting. McGraw-Hill Education.
4. Peterson, P. P., & Fabozzi, F. J. (2018). Analysis of Financial Statements. Wiley.
5. Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. Wiley.
6. Damodaran, A. (2011). Applied Corporate Finance. Wiley.
7. Block, S. B., & Hirt, G. A. (2016). Foundations of Financial Management. McGraw-Hill Education.
8. Albrecht, W. S., & Stice, E. K. (2012). Financial Accounting. Cengage Learning.
9. Penman, S. H. (2012). Accounting for Value. Columbia University Press.
10. Brealey, R. A., Myers, S. C., & Allen, F. (2014). Principles of Corporate Finance. McGraw-Hill Education.