Case Summary:
This case is primarily a capital budgeting expansion project for the company, Cape Chemical, which has done very well in the past in terms of sales and profits growth, and now needs to expand. Furthermore, the sudden withdrawal of one key competitor from the region has opened the opportunity for Cape Chemical to increase its market share. Unfortunately, the company was already operating at its maximum. So, the company needs to expand its work force and storage capacity and acquire more equipment. However, the company has no set process for capital expenditure evaluation in place. The company is unsure whether it should buy used or new equipment. Although the used equipment costs significantly less, it has an economic life of just three years, while the new equipment will last seven years.
Your task is to conduct a cash flow analysis for each alternative and provide recommendations to Cape Chemical. This case study has two sections; the first part looks at the weighted average cost of capital (WACC), and the second extends to capital budgeting. For this week, you are required to answer only questions 1-3.
Your well-written draft should answer questions 1-3 and meet the following requirements:
-Be provided in one document in Word or a similar word processing program
-Provide at least one paragraph of supporting explanation in response to each
question
-Provide an Excel spreadsheet with solutions to each question on a separate
worksheet; formulas in the spreadsheet must be linked; each worksheet
should be clearly labeled (e.g. “Question #1,” “Question #2,” etc.); and each
spreadsheet should be embedded in the Word document
