Variety Enterprises Corporation: Capital Budgeting Decision

Ilhan Meric, Kathleen Dunne, Sherry F. Li and Gulser Meric

Review of Business and Finance Studies, 2010, vol. 1, issue 1, 15-25

Abstract: The capital budgeting decision is one of the most important financial decisions in business firms. In this case, Variety Enterprises Corporation (VEC) is considering whether to invest in a new production system. To determine if the project is profitable, VEC must first determine the weighted average cost of capital to finance the project. The simple payback period, discounted payback period, net present value (NPV), internal rate of return (IRR), and modified internal rate of return (MIRR) techniques are used to study the profitability of the project. MIRR is a relatively new capital budgeting technique, which assumes that the reinvestment rate of the project’s intermediary cash flows is the firm’s cost of capital. The stand-alone risk of the project is evaluated with the sensitivity analysis and scenario analysis techniques assuming that manufacturing the new product would not affect the current market risk of the company. The case gives students an opportunity to use the theoretical profitability and risk analysis techniques explained in standard finance textbooks in a real-world setting. The case is best suited for MBA and Master of Accounting students and is expected to take approximately three to four hours to complete. The case may also be appropriate for undergraduate senior finance majors.

Keywords: Capital budgeting; weighted average cost of capital; cash flow; payback period; net present value; internal rate of return; modified internal rate of return; sensitivity analysis; scenario analysis (search for similar items in EconPapers)
JEL-codes: G31 (search for similar items in EconPapers)
Date: 2010
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