Capital Budgeting Case Study

Instructions: The assignment is based onthe case below. The instruction relating to the assignment is atthe end of the case.

Dan and Susan are facing an important decision. After havingdiscussed different financial scenarios, the two computer engineersfelt it was time to finalize their cash flow projections and moveto the next stage â decide which of two possible projects theyshould undertake.

Both had a bachelor degree in engineering and had put in severalyears as maintenance engineers in a large chip manufacturingcompany. About six months ago, they were able to exercise theirfirst stock options. That was when they decided to quit their safe,steady job and pursue their dreams of starting a venture of theirown. In their spare time, almost as a hobby, they had beencollaborating on some research into a new chip that could speed upcertain specialized tasks by as much as 25%. At this point, thedesign of the chip was complete. While further experimentationmight improve the performance of their design, any delay inentering the market now may prove to be costly, as one of theestablished players might introduce a similar product of their own.The duo knew that now was the time to act if at all.

They estimated that they would need to spend about $1,000,000 onplant, equipment and supplies. As for future cash flows, they feltthat the right strategy at least for the first year would be tosell their product at dirt-cheap prices in order to induce customeracceptance. Then, once the product had established a name foritself, the price could be raised. By the end of the fifth year,their product in its current form was likely to be obsolete.However, the innovative approach that they had devised and patentedcould be sold to a larger chip manufacturer for a decent sum.Accordingly, the two budding entrepreneurs estimated the cash flowsfor this project (call it Project A) as follows:

Year	Project A Expected Cash flows ($)
0	(1,000,000)
1	50,000
2	200,000
3	600,000
4	1,000,000
5	1,500,000

An alternative to pursuing this project would be to immediatelysell the patent for their innovative chip design to one of theestablished chip makers. They estimated that they would receivearound $200,000 for this. It would probably not be reasonable toexpect much more as neither their product nor their innovativeapproach had a track record.

They could then invest in some plant and equipment that wouldtest silicon wafers for zircon content before the wafers were usedto make chips. Too much zircon would affect the long-termperformance of the chips. The task of checking the level of zirconwas currently being performed by chip makers themselves. However,many of them, especially the smaller ones, did not have thecapacity to permit 100% checking. Most tested only a sample of thewafers they received.

Dan and Susan were confident that they could persuade at leastsome of the chip makers to outsource this function to them. Byexclusively specializing in this task, their little company wouldbe able to slash costs by more than half, and thus allow the chipmanufacturers to go in for 100% quality check for roughly the samecost as what they were incurring for a partial quality check today.The life of this project too (call it project B) is expected to beonly about five years.

The initial investment for this project is estimated at $1,100,000. After taking into account the sale of their patent, thenet investment would be $900,000. As for the future, Dan and Susanwere pretty sure that there would be sizable profits in the firstcouple of years. But thereafter, the zircon content problem wouldslowly start to disappear with advancing technology in the waferindustry. Keeping all this in mind, they estimate the cash flowsfor this project as follows:

Year	Project B Expected Cash flows ($)
0	($900,000)
1	650,000
2	650,000
3	550,000
4	300,000
5	100,000

Dan and Susan now need to make their decision. For purposes ofanalysis, they plan to use a required rate of return of 20% forboth projects. Ideally, they would prefer that the project theychoose have a payback period of less than 3.5 years and adiscounted payback period of less than 4 years.

Assignment:

Suppose that Dan and Susan have hired you as a consultant tohelp them make the decision. Please create an official presentationto present your findings and recommendations. The questions belowshould help to guide your insight.

Briefly, summarize the key facts of the case and identify theproblem being faced by our two budding entrepreneurs. In otherwords, what is the decision that they need to make? (10 points)

An excellent presentation will demonstrate the ability toconstruct a clear and insightful problem statement whileidentifying all underlying issues.

What are some approaches that can be used to solve this problem?What are various criteria or metrics that can be used to help makethis decision?

An excellent presentation will propose solutions that aresensitive to all the identified issues.

cyanyak480

WRITE a one-sentence summary of each paragraph!

The Undeserving Rich

By Paul Krugman
Published in the New York Times, Jan. 19, 2014

The reality of rising American inequality is stark. Since the late 1970s, real wages for the bottom half of the workforce have stagnated or fallen, while the incomes of the top 1 percent have nearly quadrupled (and the incomes of the top 0.1 percent have risen even more). While we can and should have a serious debate about what to do about this situation, the simple fact American capitalism as currently constituted is undermining the foundations of middle-class society shouldn't be up for argument.

But it is, of course. Partly this reflects Upton Sinclair's famous dictum: It is difficult to get a man to understand something when his salary depends on his not understanding it. But it also, I think, reflects distaste for the implications of the numbers, which seem almost like an open invitation to class warfare or, if you prefer, a demonstration that class warfare is already underway, with the plutocrats on offense.

The result has been a determined campaign of statistical obfuscation. At its cruder end, this campaign comes close to outright falsification; at its more sophisticated end, it involves using fancy footwork to propagate what I think of as the myth of the deserving rich.

For an example of de facto falsification, one need look no further than a
recent column by Bret Stephens of The Wall Street Journal, which first accused President Obama (wrongly) of making a factual error, then proceeded to assert that rising inequality was no big deal because everyone has been making big gains. Why, incomes for the bottom fifth of the U.S. population have risen 186 percent since 1979!

If this sounds wrong to you, it should: that's a nominal number, not corrected for inflation. You can find the inflation-corrected number in the same Census Bureau table; it shows incomes for the bottom fifth actually falling. Oh, and for the record, at the time of writing this elementary error had not been corrected on The Journal's website.

O.K., that's what crude obfuscation looks like. What about the fancier version?

I've noted before that conservatives seem fixated on the notion that poverty is basically the result of character problems among the poor. This may once have had a grain of truth to it, but for the past three decades and more the main obstacle facing the poor has been the lack of jobs paying decent wages. But the myth of the undeserving poor persists, and so does a counterpart myth, that of the deserving rich.

The story goes like this: America's affluent are affluent because they made the right lifestyle choices. They got themselves good educations, they got and stayed married, and so on. Basically, affluence is a reward for adhering to the Victorian virtues.

What's wrong with this story? Even on its own terms, it postulates opportunities that don't exist. For example, how are children of the poor, or even the working class, supposed to get a good education in an era of declining support for and sharply rising tuition at public universities? Even social indicators like family stability are, to an important extent, economic phenomena: nothing takes a toll on family values like lack of employment opportunities.

But the main thing about this myth is that it misidentifies the winners from growing inequality. White-collar professionals, even if married to each other, are only doing O.K. The big winners are a much smaller group. The Occupy movement popularized the concept of the 1 percent, which is a good shorthand for the rising elite, but if anything includes too many people: most of the gains of the top 1 percent have in fact gone to an even tinier elite, the top 0.1 percent.

And who are these lucky few? Mainly they're executives of some kind, especially, although not only, in finance. You can argue about whether these people deserve to be paid so well, but one thing is clear: They didn't get where they are simply by being prudent, clean, and sober.

So how can the myth of the deserving rich be sustained? Mainly through a strategy of distortion by dilution. You rarely see apologists for inequality willing to talk about the 1 percent, let alone the really big winners. Instead, they talk about the top 20 percent, or at best the top 5 percent. These may sound like innocent choices, but they're not, because they involve lumping in married lawyers with the wolves of Wall Street. The DiCaprio movie of that name, by the way, is wildly popular with finance types, who cheer on the title character another clue to the realities of our new Gilded Age.

Again, I know that these realities make some people, not all of them hired guns for the plutocracy, uncomfortable, and they'd prefer to paint a different picture. But even if the facts have a well-known populist bias, they're still the facts and they must be faced.

cerisechimpanzee766

WRITE a one-sentence summary of each essay and illustrate their relationship

The Undeserving Rich

By Paul Krugman
Published in the New York Times, Jan. 19, 2014

The reality of rising American inequality is stark. Since the late 1970s, real wages for the bottom half of the workforce have stagnated or fallen, while the incomes of the top 1 percent have nearly quadrupled (and the incomes of the top 0.1 percent have risen even more). While we can and should have a serious debate about what to do about this situation, the simple fact American capitalism as currently constituted is undermining the foundations of middle-class society shouldn't be up for argument.

But it is, of course. Partly this reflects Upton Sinclair's famous dictum: It is difficult to get a man to understand something when his salary depends on his not understanding it. But it also, I think, reflects distaste for the implications of the numbers, which seem almost like an open invitation to class warfare or, if you prefer, a demonstration that class warfare is already underway, with the plutocrats on offense.

The result has been a determined campaign of statistical obfuscation. At its cruder end, this campaign comes close to outright falsification; at its more sophisticated end, it involves using fancy footwork to propagate what I think of as the myth of the deserving rich.

For an example of de facto falsification, one need look no further than a
recent column by Bret Stephens of The Wall Street Journal, which first accused President Obama (wrongly) of making a factual error, then proceeded to assert that rising inequality was no big deal because everyone has been making big gains. Why, incomes for the bottom fifth of the U.S. population have risen 186 percent since 1979!

If this sounds wrong to you, it should: thatâs a nominal number, not corrected for inflation. You can find the inflation-corrected number in the same Census Bureau table; it shows incomes for the bottom fifth actually falling. Oh, and for the record, at the time of writing this elementary error had not been corrected on The Journalâs website.

O.K., thatâs what crude obfuscation looks like. What about the fancier version?

Iâve noted before that conservatives seem fixated on the notion that poverty is basically the result of character problems among the poor. This may once have had a grain of truth to it, but for the past three decades and more the main obstacle facing the poor has been the lack of jobs paying decent wages. But the myth of the undeserving poor persists, and so does a counterpart myth, that of the deserving rich.

The story goes like this: America's affluent are affluent because they made the right lifestyle choices. They got themselves good educations, they got and stayed married, and so on. Basically, affluence is a reward for adhering to the Victorian virtues.

Whatâs wrong with this story? Even on its own terms, it postulates opportunities that donât exist. For example, how are children of the poor, or even the working class, supposed to get a good education in an era of declining support for and sharply rising tuition at public universities? Even social indicators like family stability are, to an important extent, economic phenomena: nothing takes a toll on family values like lack of employment opportunities.

But the main thing about this myth is that it misidentifies the winners from growing inequality. White-collar professionals, even if married to each other, are only doing O.K. The big winners are a much smaller group. The Occupy movement popularized the concept of the 1 percent, which is a good shorthand for the rising elite, but if anything includes too many people: most of the gains of the top 1 percent have in fact gone to an even tinier elite, the top 0.1 percent.

And who are these lucky few? Mainly they're executives of some kind, especially, although not only, in finance. You can argue about whether these people deserve to be paid so well, but one thing is clear: They didn't get where they are simply by being prudent, clean, and sober.

So how can the myth of the deserving rich be sustained? Mainly through a strategy of distortion by dilution. You rarely see apologists for inequality willing to talk about the 1 percent, let alone the really big winners. Instead, they talk about the top 20 percent, or at best the top 5 percent. These may sound like innocent choices, but they're not, because they involve lumping in married lawyers with the wolves of Wall Street. The DiCaprio movie of that name, by the way, is wildly popular with finance types, who cheer on the title character another clue to the realities of our new Gilded Age.

Again, I know that these realities make some people, not all of them hired guns for the plutocracy, uncomfortable, and they'd prefer to paint a different picture. But even if the facts have a well-known populist bias, they're still the facts and they must be faced.

The False Income-Inequality Narrative

BY JASON L. RILEY

Published in the Wall Street Journal on Sept. 29, 2015

An enduring theme of the Democratic presidential race has been income inequality, coupled with an enduring belief that Americaâs affluent reached their status at the expense of the poor and the middle class.

Bernie Sanders speaks of little else on the stump. And when not busy dissembling on her handling of email correspondence at the State Department, Hillary Clinton will tell you that the âdeck is still stacked in favor of those at the top.â If Joe Biden gets in, expect more of the same. The vice president is said to be contemplating a 2016 bid in large part because struggling middle-income families may have trouble relating to Mrs. Clinton on inequality given her high living since leaving the White House.

This theme, in any case, seems to resonate with voters, which is no huge shock in the sixth year of an economic recovery. Envy and resentment fuel class warfare and lackluster economic growth throughout the Obama presidency have made people less optimistic and more inclined to fault others for their circumstances. A Wall Street Journal/NBC News poll this week reports that four-in-five Americans âwere either angry because our political system seems to only be working for the insiders with money and power or anxious and uncertain. After all, the economy still feels rocky and unpredictable or both.

Liberals want to address income disparities through wealth redistributionby taking money from more productive people and giving it to the less productive in the name of fairness as the left defines it. They want to raise income taxes, expand the welfare state, lift minimum wages, and strengthen the bargaining power of unions. Mr. Sanders has been the most explicit about this, even going so far as to propose a wealth tax. Our economic goals have to be redistributing a significant amount of [wealth] back from the top 1%, the senator said in July.

In reality, the left has overstated the problem. And all the focus on divvying up existing wealth instead of creating more risks making matters far worse for the people they are trying to help and the country in general. to the extent that the expanding welfare state allows more people to live without working and therefore without earning income or developing their own human capital supporters of the welfare state are contributing to the very income disparities they so much decry, writes economist Thomas Sowell in his new book, âWealth, Poverty and Politics.â

Mr. Sowell is the author of more than 30 books over the past four decades, many having to do with what drives different social and economic outcomes among different groups in the U.S. and elsewhere. In his latest tome, he draws from this well of research to do what he has done so well for so long: question basic assumptions behind public policy and follow the facts where they lead him.

One common assumption is that proportionate or random outcomes are the natural order of things and that gaps or disparities are evidence of something wrong. In fact, huge disparities are the norm, not the exception, because the demographic, cultural, and political factors that influence the development of the human capital that makes people productive also tend to be unequal.

In 2013, only 9% of U.S. women with college degrees who gave birth were unmarried, versus 61% of women who were high-school dropouts and unmarried. Harvard's Robert Putnam reports that children from professional families will hear 19 million more words than their working-class peers before the first day of kindergarten.

These children don't have the same prospects. Equal opportunity, in the sense of being judged and rewarded by the same standards as others, cannot possibly mean equal life chances for children born and raised in these very different settings, writes Mr. Sowell. The fact that life is unfair is not the same as saying that a particular institution, or a particular society, is unfair.

The argument that social mobility is a thing of the past in the U.S. also is disputable. Longitudinal studies by the IRS and others that measure the progress of individuals over time show that the American dream is alive and well. One such paper, published by the Pew Charitable Trusts in 2012, measured âwhether a person has more or less income, earnings, or wealth than his or her parents did at the same age and concluded that âthe vast majority of Americans had higher incomes, while 50% had greater wealth.

In other studies, Pew has found generational stagnation but the authors have noted that it didn't apply to immigrants. If low-income immigrants can rise even when the native-born don't, writes Mr. Sowell, that strongly suggests that American society continues to offer opportunities to move up economically, but that not all groups make the same use of these opportunities.

Mr. Riley, a Manhattan Institute senior fellow and Journal contributor is the author of Please Stop Helping Us: How Liberals Make It Harder for Blacks to Succeed (Encounter Books, 2014).

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