FIN 215 Discussion – Capital Budgeting Case Study (Questions
Only)
Please answer these questions below after reading the article provided in Canvas:
1) Using Table 1 in the case duplicate the sensitivity analysis of the production points for the three options
considered in the case by management: 1) Build an entire new production facility that would enable
GEI to produce all of the products it needed, 2) Outsource production to build partners, 3) Expand the
existing GEI facility to increase production. Construct these in a spreadsheet resembling the following
(start with 100 units and increment the units upward by 100 units until you have calculated it to 30,000
units:
Fixed costs
Variable cost
Units
100
200
…
…
³0000
Option 1
New location
$4,000,000.00
$55.00
Option 2
Subcontract
$0.00
$255.00
Option 3
Expand
$1,250,000.00
$155.00
Total costs per proposal &ixed and variable
Plan A
Plan B
Plan C
New location Subcontract
Expand
Calculate this Calculate this
Calculate this
2) Review the spreadsheet created above as a group and identify the production points where each option
is attractive. Draw a chart (by hand or with spreadsheet software) showing the total cost lines of the
three options. Plot total cost on the Y-axis and units of production on the X-axis for the three options.
Identify the option that makes the most financial sense for the firm for 12,000, 13,000 and 28,000 units.
Net Present Value
3) Review Figure 3 that shows the cash flows estimated before and after Katrina. Calculate the NPV of
cash flows for each stream of cash before and after Katrina using a discount rate of 9%. Remember
that Figure 3 uses monthly cash flows and the discount rate is an annual rate. Use the following format
(only part of Figure 3 is shown below).
FIN 215 ase Study
1
Date
Old Sales Estimate
for PowrFlo 500 (units)
Old NPV of cash flow
sales price of $499.00
Oct-05
350
Calculate this
New Sales Estimate
New NPV of cash flow
for PowrFlo 500 (units) sales price of $499.00
2700
Calculate this
Break Even Point
4) Use the fixed costs (Figure 1), the marginal cost per unit (Figure 1) and the average revenue per unit
($499.00) to calculate a Breakeven point in units for each of the methods (expand, outsource, new
plant) in Figure 1.
Other opportunities
5) How might the service plan to maintain generators be used by GEI to provide a future revenue
stream?
FIN 215 ase Study
2

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