The Pinnacle Corporation - Capital Budgeting

THE PINNACLE CORPORATION

CAPITAL BUDGETING

II CASE STUDY

DECEMBER 2014

SUBJECT: The Pinnacle Corporation Capital Budgeting Case Study

Table of Contents

Question 1 .................................................................................................................................................... 3

Question 2 .................................................................................................................................................... 4

Question 3 .................................................................................................................................................... 4

Question 4 .................................................................................................................................................... 5

Question 5 .................................................................................................................................................... 5

Question 6 .................................................................................................................................................... 5

Question 7 .................................................................................................................................................... 6

Question 8 .................................................................................................................................................... 9

Question 9 .................................................................................................................................................... 9

Question 10 ................................................................................................................................................ 10

Question 11 ................................................................................................................................................ 12

Question 1

a.) What is a firm’s strategic policy? How, if at all, does it influence a firm’s choice of capital

budgeting projects?

The Pinnacle Corporation has three main production divisions: ball production, equipment

production and accessories production. They had the idea to introduce new project, so called

Medallion LS, besides they had three main options, three strategies to choose from. According to

the first one, no new project was needed and they would raise their revenue because of the boom

in this industry, the second strategy was suggesting that there was no demand on old accessories

and only new production was profitable and finally, according to the third strategy, both of the

projects were important. If they implemented new project they saved $1 million of working

capital and they didn’t have land cost.

We think, that firm’s strategic policy would influence The Pinnacle Corporation’s choice of

capital budgeting strategy. Because with different options they had different expenses, for

example if Keep OLD strategy was selected, then the firm would lack sufficient managerial and

technical expertise for any other major expansion.

b.) What is and “unbiased” cash flow forecast? Do you find it surprising that studies have

found that the actual CF of “sales projects” tend to be well below the predicted amounts?

Defend your answer.

The challenge in practice is that the cash flows forecasts may be a biased measure of the

expected