The Pinnacle Corporation - Capital Budgeting

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cash flows. But, as we know, there was expected boom in golf industry, because of this,

there’s expected increase of demand on balls, equipment and accessories but in “real” terms. So

the company expects 10% increase in sales without new project implementation. We think, that

10% increase in sales would cause increased cash flows in following years, and this in case of

keeping only old inventory.

Question 2

Majority of the companies use different RRR for different projects and count WACC and NPV

separately. That is because every project has its own costs, labor requirements, equipment, sales,

opportunity cost, COGS and so on.

The three projects given in case study, are financed by one company budget, but it does not mean

that the firm should use the same rate.

In our case, The Pinnacle Corporation is going to launch new project, which has its own RRR

estimated as 12%, so if the company wants to estimate future sales, NPV or other important

numbers it should use RRR which is especially estimated for this project, this will give precise

and real results rather than mislead managers.

Question 3

The Pinnacle Corporation produces 40 000 sets of balls which is sold on the market at $600 each

set. While introducing new product the company decided, to increases price by $50 to decrease

existing demand in the market so equilibrium will be achieved, until competitors will also

develop and after this they will reduce price. But what kind of effect it may have on required

working capital which represents A/R + Inventory - A/P - Accruals?

We also think, that no additional working capital will be required, because the company doesn’t

increase sets production, it just increases price, and quantity of production doesn’t change so no

additional facilities, equipment is needed. As price per set increases so increases A/R, inventory

and A/P stay same, but accruals may increase because it includes future tax liabilities. Amount of

tax liability will be increased, because as revenue increases so increases its 40% which is tax.

Question 4

N=6

R=12%

NPV=$6043000

......=

16001+0.12+

27001.122+

43001.123+

56001.124+

56001.125+

98001.126-$12300=$6’043.1266

Question 5

According to the Exhibit 5a:

N=6

Discount Rate=14%

NPV=$4’666(000)

According to the Exhibit 5b:

N=6

Discount Rate=14%

......=

31001+0.14+

34001.122+

42001.123+

42001.124+

42001.125+

90001.126-$11’600=$5’338.7327

Question 6

a.) The company produces 40 000 sets of golf balls and actually on the market there’s demand

on 65 000 sets, so there’s shortage. Besides, company decided to increase price. We think,

that this strategy will work well, because, in case of shortage people are willing to pay any

amount of money to obtain desired goods or services.

In case of increased price, The Pinnacle Corporation will faster cover its initial investment,

apart from this, companies annual cash flows will increase (because people will buy in any

case) which is another advantage of price raising.

b.) When we do estimation using NPV, it considers TVM. This is very important when we have

to deal with prices and money in general, because different interest rate fluctuations cause

money value appreciation or depreciation. With the NPV method, another advantage is that it

is a direct measure of the dollar contribution to the stockholders.

Question 7

a.)

t=0

t+1