“MBA
509 Summer II 2014 Capital Budgeting Case

Read the case very carefully. Nearly every
statement I make has a specific purpose.
I use very little “”filler”” material. Look for the purpose / implications of all of
the content you are given within the case.
You need to think carefully and with well-rounded diligence. I need to see true insight in your
quantitative and qualitative responses.
I want you, at a minimum (note the use of the word minimum) to address
the baseline requirements of the board of directors (given to you at the end of
the case) but as we discussed in class remember to anticipate the logical
questions that you might get when you (in real practice) deliver your findings.
Within reason, anticipate
and address these logical questions. The
bar is raised on the grading for this one.
Show me your best MBA level effort.
Proof thoroughly.

BACKGROUND
Carter
Enterprises Inc. is considering a capital investment of $8,000,000 to purchase
a new computerized/robotic materials handling system for its warehouse and
order fulfillment operations.
The
firm is facing the retirement of an atypical number of skilled warehouse and
order fulfillment employees and instead of hiring one new employee for each one
retiree, the firm is considering hiring one new employee for each 3
retirees. The loss of manpower is
expected to be offset by the efficiencies of the new automated system. In addition, the new system is expected to
substantially improve inventory management and thus reduce the number and dollar
amount of merchandise stock outs and the accompanying number of unhappy
customers and lost sales.

DETAILED FINANCIAL FORECASTS
The
forecasted, ready to place into service, cost of the new system is
$8,000,000. Labor and related cost
savings as well as other key forecasts are expected to be as displayed in the
chart below. These amounts were provided to you by various sources and should
be used in your first pass
preparation. Carter expects to
have a six year operational period for the equipment. At the end of year six Carter expects to sell
the equipment for approximately 15% of the original in service cost. Carter has historically used a hurdle rate
of 14% to evaluate
capital projects. The firm’s WACC is
approximately 11%. The
firm has never undertaken a project like this that was so dependent on the use
of new technology. Existing staff does
not possess the necessary technical skills to fully operate the new
equipment. Between training and new
hires, that expertise will hopefully
be obtained. The cost of training
existing staff and the to be hired technical staff is included in the values
below. Many of these forecasts were
developed with the help of the equipment
manufacturer.

F O R E C A S T E D P R E T A X V A L U E S

Y E A R I
N S E R V
I C E

Forecasted Item 1
2 3 4 5 6
Labor
Related Cost Savings $1,600,000 $1,670,000
$1,750,000 $1,850,000 $1,920,000
$2,000,000
Recovered
Sales from
fewer stock outs 1,800,000
1,870,000 1,930,000 2,050,000 2,100,000 2,180,000
Variable
Cost ratio linked
to recovered sales 60% 60% 60% 60% 60% 60%
Corporate
Tax Rate 40% 40% 40% 40% 40% 40%
Depreciation
Expense 620,000 1,240,000 1,240,000
1,240,000 1,240,000
1,240,000
Sale
of used system
1,200,000
System
upgrade expense
(fully
tax deductible in year 3) 250,000
Use time period/ year “”0″” for the
purchase price of $8,000,000
Hurdle
rate used to calculate the first pass NPV
14%

BOD First Pass requirements –
(1) Prepare a well organized MS Excel schedule that displays
your calculation of the project’s NPV. I
want first class organization and presentation.
(2) Provide commentary related to the
included line items, the estimates, the outcomes – show me (the BOD) your
insight quantitatively and qualitatively.
Remember my comments about anticipation. Well rounded thought…………show me depth of thinking / analysis.
(3) A strong / specific conclusion

Structure of the package to the BOD ( likely in the five page range – this is not a firm
number…..neither a minimum or a maximum) –
Professional
cover page (always remember your audience)
Intro to the project………….the
purpose of your report
Summarize key assumptions – Those given to
you (for the first pass) and any that you used for additional passes
Summarize key findings that will be
supported by your model and your analysis / commentary
Your MS Excel file (you don’t need to embed
the file into your MS word document……. you can attach as an exhibit…….
a separate MS Excel file is fine. Be
sure to specifically link your commentary, as appropriate, to the model. Once again remember our “”anticipation””
discussion.
Clear conclusion with detailed reflection
on the key outcomes

NOTE: Do not use comments like See attached
file for calculation, etc. Always provide information/number what you are
talking about. Management doesnt have time to go back and find. MBA
509 Summer II 2014 Capital Budgeting CaseRead
the case very carefully. Nearly every
statement I make has a specific purpose.
I use very little “”filler”” material. Look for the purpose / implications of all of
the content you are given within the case.
You need to think carefully and with well-rounded diligence. I need to see true insight in your
quantitative and qualitative responses.
I want you, at a minimum (note the use of the word minimum) to address
the baseline requirements of the board of directors (given to you at the end of
the case) but as we discussed in class remember to anticipate the logical
questions that you might get when you (in real practice) deliver your findings.
Within reason, anticipate
and address these logical questions. The
bar is raised on the grading for this one.
Show me your best MBA level effort.
Proof thoroughly.BACKGROUNDCarter
Enterprises Inc. is considering a capital investment of $8,000,000 to purchase
a new computerized/robotic materials handling system for its warehouse and
order fulfillment operations.The
firm is facing the retirement of an atypical number of skilled warehouse and
order fulfillment employees and instead of hiring one new employee for each one
retiree, the firm is considering hiring one new employee for each 3
retirees. The loss of manpower is
expected to be offset by the efficiencies of the new automated system. In addition, the new system is expected to
substantially improve inventory management and thus reduce the number and dollar
amount of merchandise stock outs and the accompanying number of unhappy
customers and lost sales.DETAILED FINANCIAL FORECASTS The
forecasted, ready to place into service, cost of the new system is
$8,000,000. Labor and related cost
savings as well as other key forecasts are expected to be as displayed in the
chart below. These amounts were provided to you by various sources and should
be used in your first pass
preparation. Carter expects to
have a six year operational period for the equipment. At the end of year six Carter expects to sell
the equipment for approximately 15% of the original in service cost. Carter has historically used a hurdle rate
of 14% to evaluate
capital projects. The firm’s WACC is
approximately 11%. The
firm has never undertaken a project like this that was so dependent on the use
of new technology. Existing staff does
not possess the necessary technical skills to fully operate the new
equipment. Between training and new
hires, that expertise will hopefully
be obtained. The cost of training
existing staff and the to be hired technical staff is included in the values
below. Many of these forecasts were
developed with the help of the equipment
manufacturer.
F O R E C A S T E D P R E T A X V A L U E S
Y E A R I
N S E R V
I C E
Forecasted Item 1
2 3 4 5 6Labor
Related Cost Savings $1,600,000 $1,670,000
$1,750,000 $1,850,000 $1,920,000
$2,000,000 Recovered
Sales from fewer stock outs 1,800,000
1,870,000 1,930,000 2,050,000 2,100,000 2,180,000Variable
Cost ratio linked to recovered sales 60% 60% 60% 60% 60% 60%Corporate
Tax Rate 40% 40% 40% 40% 40% 40%Depreciation
Expense 620,000 1,240,000 1,240,000
1,240,000 1,240,000
1,240,000 Sale
of used system
1,200,000System
upgrade expense(fully
tax deductible in year 3) 250,000Use time period/ year “”0″” for the
purchase price of $8,000,000 Hurdle
rate used to calculate the first pass NPV
14%BOD First Pass requirements -(1) Prepare a well organized MS Excel schedule that displays
your calculation of the project’s NPV. I
want first class organization and presentation.(2) Provide commentary related to the
included line items, the estimates, the outcomes – show me (the BOD) your
insight quantitatively and qualitatively.
Remember my comments about anticipation. Well rounded thought…………show me depth of thinking / analysis.(3) A strong / specific conclusionStructure of the package to the BOD ( likely in the five page range – this is not a firm
number…..neither a minimum or a maximum) -Professional
cover page (always remember your audience)Intro to the project………….the
purpose of your reportSummarize key assumptions – Those given to
you (for the first pass) and any that you used for additional passesSummarize key findings that will be
supported by your model and your analysis / commentaryYour MS Excel file (you don’t need to embed
the file into your MS word document……. you can attach as an exhibit…….
a separate MS Excel file is fine. Be
sure to specifically link your commentary, as appropriate, to the model. Once again remember our “”anticipation””
discussion.Clear conclusion with detailed reflection
on the key outcomesNOTE: Do not use comments like See attached
file for calculation, etc. Always provide information/number what you are
talking about. Management doesnt have time to go back and find. “