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.)
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.
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 ...
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.