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Internal rate of return Note and Letter to the Board of Director

Application: A Letter to the Board of Directors
Decisions involving capital expenditures often require managers to weight the costs and benefits of different options related to the same goal or project. For instance, deciding whether to replace, repair, or do nothing to existing equipment is a capital expenditure decision that involves calculations, projections, and deliberations. Managers must be able to quantitatively analyze different options for capital expenditures to make the best decisions for their organization.
For this Assignment, review the information in the scenario presented. You will utilize the information in this week's resources and media to make a recommendation in regard to a capital expenditure.

Garrison Appliances, Inc. is considering expanding its international presence. It sells 25% of all the toaster ovens sold in the United States but only 3% of the toaster ovens sold outside of the United States. The organization believes that it can sell more of its product if it has a production facility located overseas. Estimates concerning two possible locations, Mumbai and Bangalore, India follow:

Possible Location Mumbai Bangalore
Initial cash outlay $2,800,000 $2,800,000
Useful life 20 years 20 years

Net cash inflows excluding depreciation
$1,100,000 $1,100,000
The cost of capital 9% 9%
Tax rate 40% 40%

The Assignment:
Part 1: Prepare a spreadsheet using Excel or a similar program in which you compute the following for each proposed location:
Accounting rate of return on investment
Net present value

Internal rate of return Note: Be sure to view the media for this week before starting this Assignment.
Part 2: Utilizing Word or another word processing software program, prepare a written report for the Board of Directors:
Include a detailed explanation of the conclusion you reached regarding the feasibility of each proposal.
Explain any non-financial items (e.g., culture, language, etc.), which may impact the perceived desirability of each location.
Select the one location you recommend the Board invest in. Explain your rationale.

Solution Preview

Part 1
All the elements - initial cash outlay, useful life, net cash inflows excluding depreciation, cost of capital, and tax rate - are the same for the Mumbai and Bangalore locations. Therefore the computed accounting rate of return, payback and net present value for both locations are the same. However, the Excel file (see other attached file) was set up in a way that you only ...

Solution Summary

Capital project analysis for Garrison Appliances, Inc. The internal rate of return for the note is determined. Decisions involving capital expenditures are provided in a letter to the board of directors.