## Southwest Rafters Case 2:Case 1: Capital Budgeting Cash Flows and Capital Budgeting Techniques Create a data sheet (or section) and link calculations to the data so that if the data is updated the calculations automatically update. 1) Calculate the Initial Cash Outlay and Annual Capital Budgeting Cash Flow for years 1 thru 5 for both alternatives. 2) Discuss the ethical implications of this business. Might there be a difference between these two alternatives? 3) Calculate the Payback Period, Net Present Value and Internal Rate of Return for both alternatives based on your Initial Cash Outlay and Capital Budgeting Cash Flows. 4) Calculate NPV and IRR if cash flows increase at an estimated 6% annual rate. 5) What discount rate would leave them indifferent between the two alternatives? 6) What does the discount rate in #5 imply about the growth rate needed to make the Buenaventura better than the Green? 7) What is the probability of negative NPV both in the case of perfect serial correlation and in the case of independence of cash flows for both alternatives? Assume no growth and a $5,000 standard deviation of annual cash flow for both alternatives. 8) Calculate Accounting (Profit) and Cash Breakeven Points (average number of clients per trip) and the Degree of Operating Leverage for both alternatives for year 1. Treat all revenue as variable. Treat all expenses as fixed except the client portion of transportation and food and the administrative cost. Include externalities. If you spreadsheet is functional BEP is easy! 9) Could either alternative have Multiple Internal Rates of Return? Explain 10) Discuss the option values associated with these alternatives. Is there a difference between them? 11) Which alternative do you recommend for Southwest Rafters? Defend your choice using the results from the other questions. Assume that the assumptions are reasonable.

Case 1 The answer is in excel sheet no 1. … Read More...