CEO of your company is considering investing in one of the four projects offered to your company.

CEO of your company is considering investing in one of the four projects offered to your company. With no background in financial theory, he is not sure which project should be selected. In addition, he is not very much aware about the financial health of the company. He is confident about your analytical skills and want you to analyze company’s financial statements and recommend the best project for the investment.

During the meeting your CEO has provided you the financial statements and shared the details of the following four projects, all of which are considered to be equally risky with 10% minimum acceptable rate of return. The company uses a straight uses a straight-line method for calculating depreciation and the company’s tax rate is 33%.

Proposal A:

This proposal is to buy machine. Machine is six years old and was considered a good buy at 400,000. In return, the machine would bring the following revenue and operating costs. Salvage value is ignored.

	YR-0	YR-1	YR-2	YR-3	YR-4	YR-5
Initial investment	-400,000
Revenue		44,000	78,000	112,300	225,000	168,750
Operating costs		11,250	12,000	12,500	13,000	14,000
Depreciation Expense		60,000	60,000	60,000	60,000	60,000

 

Proposal B:

This proposal is to diversity into copy machines. The new business was expected to bring the following revenue and operating costs, Salvage value ignored.

	YR-0	YR-1	YR-2	YR-3	YR-4	YR-5
Initial investment	-600,000
Revenue		87,500	175,000	262,500	393,750	525,000
Operating costs		26,000	27,000	29,000	30,000	32,000
Depreciation Expense		18,000	18,000	18,000	18,000	18,000

 

Proposal C:

This proposal is to buy a jet. The jet was expensive and, counting additional training and licensing requirements. However, it would give the company access to wider market as well. Salvage value is ignored.

	YR-0	YR-1	YR-2	YR-3	YR-4	YR-5
Initial investment	-800,000
Revenue		200,000	300,000	400,000	450,000	500,000
Operating costs		60,000	85,000	95,000	98,000	105,000
Depreciation Expense		140,000	140,000	140,000	140,000	140,000

 

Proposal D:

This proposal is to begin operating fleet of trucks. Ten trucks could be bought for only $61,000 each, and the additional business would bring above $700,000 in new sales in the first two years alone. Following are key financial figures: salvage value is ignored

	YR-0	YR-1	YR-2	YR-3	YR-4	YR-5
Initial investment	-610,000
Revenue		382,500	325,125	89,250	76,500	51,000
Operating costs		31,000	31,000	31,000	31,000	31,000
Depreciation Expense		102,000	102,000	102,000	102,000	102,000

CEO has particular discussed his worries/ concerns of the recent economic conditions and his speculation is that operating cost might increase by 10% than expected and revenue might decrease by 5% than the expected!

 

You are planning to use payback, internal rate of return, and net present value evaluation methods. (I already calculate that)

Your facing one constraint that there is no outside financing be used this year. CEO is against a stock issue for fear of diluting earning and his control over the firm. As a result, the size of the capital budget this year is limited to $800,000, which meant that only one of the four projects under consideration could be chosen. You are not too happy about the situation but you have to concentrate on selecting the best of the four.

Do not forget that selection of the project also depends upon the sensible financial analysis of the last two year’s financial statements of the company. You can convince your boss with sound financial analysis and sensible arguments!

 

Analysis of capital investment projects.

 

PART A:

You will give the CEO a recommendation of which one is the best proposal to choose with an explanation you must support your recommendation to give the CEO evidence from the calculation on the excel sheet (payback, NPV, IRR)

Hint: Payback is nothing about risk its only give which year they can paybackthe exact payback year, IRR only help to get a percentage to show if the percentage is greater than discount rate so they have to except the project or not, NPV is the most important reliable risk because it give us idea of accepted profit for the project so your decision must rely on NPV but also you have to explain the whole idea.

 

Write a report to your CEO about the financial health of the company:

a.Complete financial statements Analysis report to the CEO

1. Recommendation as to which proposal should be adopted in each scenario and the reasons for your recommendation in order to address his concerns and convince him of your choice.

 

 

PART B:

CEO has particular discussed his worries/ concerns of the recent economic conditions and his speculation is that operating cost might increase by 10% than expected and revenue might decrease by 5% than the expected! (check the excel sheet name: calculation with change)

NOTE: In the second calculation with changes you have to check whether your decision will change? If yes- why?

Write a report to your CEO about the financial health of the company:

a.Complete financial statements Analysis report to the CEO

1. Recommendation as to which proposal should be adopted in each scenario and the reasons for your recommendation in order to address his concerns and convince him of your choice.

Do not forget that selection of the project also depends upon the sensible financial analysis of the last two year’s financial statements of the company. You can convince your boss with sound financial analysis and sensible arguments!