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Excel Assignment (THIS IS AN INDIVIDUAL ASSIGNMENT, SO PLEASE TURN IN YOUR OWN WORK USING YOUR OWN WORDING, ETC.
Excel Assignment
(THIS IS AN INDIVIDUAL ASSIGNMENT, SO PLEASE TURN IN YOUR OWN WORK USING YOUR OWN WORDING, ETC.)
ABC Manufacturing expects to sell 1,025 units of product in 2018 at an average price of $100,000 each based on current demand.
The Chief Marketing Officer forecasts growth of 50 units per year through 2022. So, the demand will be 1,025 units in 2018, 1,075 units
in 2019, etc. and the $100,000 price will remain consistent for all five years of the investment life. However, ABC cannot produce more
than 1,000 units annually based on current capacity.
In order to meet demand, ABC must either update the current plant or replace it. If the plant is replaced, an initial working capital investment
of $5,000,000 is required and these funds will be released at the end of the investment life to be used elsewhere.
The following table summarizes the projected data for both options:
UpdateReplace
Initial investment in 2018$100,000,000 $135,000,000
Terminal salvage value in 2022$10,000,000 $-
Working capital investment required$- $5,000,000
Useful life5 years5 years
Total annual cash operating costs per unit$75,000 $65,000
The investment will be made at the beginning of 2018 and all transactions after that are
assumed to occur on the last day of each year. ABC's required rate of return is 12%.
Required: [Please refer to the two Excel video lectures posted on Blackboard for Ch. 13 for guidance when setting up your
spreadsheet. You may set up your spreadsheet using this file (on a separate Excel worksheet) to address requirement #1 and #2 and
answer question #3 directly on the spreadsheet. There are multiple ways to set up your spreadsheet and part of the exercise is each
student setting up his/her own spreadsheet.]
1. Using Excel functions and formulas, calculate the net present value for both the update and replace alternatives.
2. Using Excel functions and formulas, calculate the internal rate of return for both the update and replace alternatives.
3. Calculate the project profitability index (PPI) for both the update and replace alternatives.
4. Based on the results, which option should ABC choose? Specifically explain why.
