Purchase Solution

Financial management practice and documentation

Not what you're looking for?

Ask Custom Question

You will perform an analysis based on information provided and determine the most desirable investment
alternative to select. The analysis involves the choice between two mutually exclusive investment proposals
to install two types of machinery that yield different operating efficiencies that affect cash flow. The objective
of this is to select the investment alternative that best fits the long-term strategic goals and objectives of the
company and that produces the economic impact most favorable to the maximization of shareholder wealth.

Prepare a report on the following features of the company.

? Assume that the company will use its WACC (weighted average cost of capital) as the
discount rate basis for analysis. Given the firm's current capital structure, what is the
firm's WACC? You may assume the WACC to be 2 points plus the prevailing New York
prime lending rate. The superior paper will go through a detailed calculation of the
WACC. Interpret the firm's future financing limitations and suggest a strategy to finance
the project. (Your paper will lose 10 percent if you use the prime plus 2 point option.)
? Are there any capital rationing limitations to consider?
? Describe the impact of varying the levels of working capital on asset levels.
? Based on the financial research and analysis skills you are developing, describe the financial management practices, documentation, and risk levels of the organization.
Further assume the following parameters for calculation purposes:
? Management has established a target required rate of return of 20% on all capital projects.
? The company's average tax rate is 40%.
? Detailed information on each investment alternative is as follows:

Detailed information on each investment alternative

Parameter Machine A Machine B
Invoice Price $ 100,000 $50,000
Shipping/Installation $ 20,000 $ 10,000
MACRS Class 3 3
Project Life 5-years 5-years
Salvage Value $ 50,000 $ 0
Incremental Revenues (EBITD; before taxes and depreciation. Note, these are not cash flows so you must convert.)
EBITD EBITD
Year - 1 $125,000 $135,000
Year - 2 $125,000 $135,000
Year - 3 $125,000 $135,000
Year - 4 $125,000 $110,000
Year - 5 $125,000 $110,000

1. Construct a timeline for each of the project's cash flows.
2. Do the cash flows include any considerations for interest expense and dividends? Why or why not?
3. Based on the information provided, calculate each project's NPV, IRR, and payback for each option. Discuss the need for an MIRR calculation.
4. Discuss the criteria for selecting the appropriate alternative, and make your recommendation.

Attachments
Purchase this Solution
Solution Summary

This post shows how to make a report based on the financial research and analysis skills, describing the financial management practices, documentation and risk levels of the organization. It describes the impact of varying the levels of working capital on asset levels.

Solution Preview

See the attached files.

The calculations are in Excel file and write up is in word document.

Identifying the Best Investment Alternative

In this assignment, we analyze two mutually exclusive investment proposals with the objective of selecting the investment objective that best fits the long-term strategic goals and objectives of the company. The two projects considered are installation of two types of machinery that yield different operating efficiencies and hence produce different levels of economic impact to the maximization of shareholder wealth.

In this exercise, we assume that the company uses its WACC (weighted average cost of capital) as the discount rate basis for analysis. Since, we are provided the target required rate of return to be used for all capital projects as 20%, the relevant discount rate for the capital investment decision-making is 20%. There is no need to separately calculate the WACC for the company.

The two alternative projects available to the company are mutually exclusive i.e. we can choose only one of the two projects for investment. Although, the two projects required quite different initial investment, the fact that these are provided as competing mutually exclusive alternatives, we assume that the company has resources required to invest in the selected project. Hence, in this particular situation, the company does not face any capital rationing limitations.

The detailed information on each investment alternative does not provide any detail on the working capital change. This can happen in two scenarios: first when there is no working capital change needed with both investment alternatives, second when both alternatives require same change in working capital so that from the comparative point of view working capital becomes ...

Purchase this Solution
Free BrainMass Quizzes
Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

Business Processes

This quiz is intended to help business students better understand business processes, including those related to manufacturing and marketing. The questions focus on terms used to describe business processes and marketing activities.

Marketing Research and Forecasting

The following quiz will assess your ability to identify steps in the marketing research process. Understanding this information will provide fundamental knowledge related to marketing research.

Introduction to Finance

This quiz test introductory finance topics.

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

View More Free Quizzes
Related BrainMass Solutions

  • Auditing and Assurance Services: Evaluating Results

    When he completes the review, he prepares a draft of the financial statements, gets them approved by management, and has them assembled in his firm's office.

  • Financial Statement Fraud: Ficitious Revenues and Other Forms

    This management practice allows management, if they overstated revenues, to keep the level of their accounts receivable normal which could have been bloated given the overbooking of revenues - Documentation and Information to obtain - Cash receipts

  • Audit: 25 T-F plus an audit program for cash

    Perform interviews with management and b. Send confirmations to clients to confirm the balances owed. 22. A change in accounting method will always result in a qualified opinion. 23.

  • Scope of Practice for Healthcare

    The oncologist's scope of practice includes chemotherapy and its side effects, diagnoses of febrile neutropenia, management of pain and symptoms, draining ascites, ordering blood and radiology tests, medicine prescriptions, and documentation of medical

  • Avoiding Liability for Racial Harassment in the Workplace

    When management doesn't practice proper documentation techniques, claims abound and management finds it more difficult to defend against claims. This is a good business practice for several reasons including claims against any form of harassment.

  • Sarbanes-Oxley Requirements

    Processes include these changes to documentation: Quarterly certification letters, in which individual business unit managers and those who prepare underlying financial and business information for the consolidated financial statements and MD&A certify

  • Financial Statement Fraud Scheme..

    In addition to the above, the practice of management, to make payments in advance for the materials and supplies and receipt of those materials and supplies in the next month, also created problems in the examination.

  • Ethical challenges: debtor-creditor relationships

    The question implies that the accountant is independent by the use of the term 'client' and that the accountant is preparing some type of financial reporting or financial statements for the client.

  • Auditor collect documentation, perform analytical procedures

    The main reason why they would collect documentation is due to the relevance of the documentation to management assertion. This helps an auditor to be able test the assertion through tracing of documents and transactions.

  • Finance for non-finance managers (health-care)

    private practice.

View More Related Solutions