OVERVIEW: Create an Excel spreadsheet in which you use capital budgeting tools to determine the quality of 3 proposed investment projects, as well as a 6-8 page report that analyzes your computations and recommends the project that will bring the most value to the company.

RESOURCES:

  • Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill. Available from the bookstore.
  • Chapter 5, “Interest Rates and Bond Valuation,” pages 130–164. This chapter illustrates the employment of time value of money concepts to determine the value of corporate debt/bonds and common/preferred stock.
  • McCracken, M. (n.d.). Bond valuation [Video] | Transcript Retrieved from http://www.teachmefinance.com/bondvaluation.html

INSTRUCTIONS: The proposed projects for you to review are as follows.

Project A: Major Equipment Purchase

  • A new major equipment purchase, which will cost $10 million; however, it is projected to reduce cost of sales by 5% per year for 8 years.
  • The equipment is projected to be sold for salvage value estimated to be $500,000 at the end of year 8.
  • Being a relatively safe investment, the required rate of return of the project is 8%.
  • The equipment will be depreciated at a MACRS 7-year schedule.
  • Annual sales for year 1 are projected at $20 million and should stay the same per year for 8 years.
  • Before this project, cost of sales has been 60%.
  • The marginal corporate tax rate is presumed to be 25%.

Project B: Expansion into Europe

  • Expansion into Western Europe has a forecast to increase sales/revenues and cost of sales by 10% per year for 5 years.
  • Annual sales for the previous year were $20 million.
  • Start-up costs are projected to be $7 million and an upfront needed investment in net working capital of $1 million. The working capital amount will be recouped at the end of year 5.
  • Because of the higher European tax rate, the marginal corporate tax rate is presumed to be 30%.
  • Being a risky investment, the required rate of return of the project is 12%.

Project C: Marketing/Advertising Campaign

  • A major new marketing/advertising campaign, which will cost $2 million per year and last 6 years.
  • It is forecast that the campaign will increase sales/revenues and costs of sales by 15% per year.
  • Annual sales for the previous year were $20 million.
  • The marginal corporate tax rate is presumed to be 25%.
  • Being a moderate risk investment, the required rate of return of the project is 10%.

Requirements

Jennifer reiterates that your report is critical for the company to select the project that will bring the most value to shareholders. Your calculations and report should address these items for her and other stakeholders:

  • Apply computations of capital budgeting methods to determine the quality of the proposed investments.
    • Evaluate the capital projects using data analysis and applicable metrics that align to the business goal of maximizing shareholder value.
      • Select the best capital project, based on data analysis and evaluation, that will add the most value for the company.
      • Prepare an appropriate evaluation report for requestors, using sound research and data to defend your decision.

        Deliverable Format

        For this assessment, create two deliverables:

        • An Excel spreadsheet showing the required cash flow forecasts and capital budgeting tool calculations for each project. Use the same spreadsheet but create separate tabs for each project.
        • A report providing an analysis of the computations, the project selection decision, and justification for the decision, as well as its impact on the value of the firm. The project selection decision must have an analytical rationale to support it.

        Report requirements:

        • Ensure written communication is free of errors that detract from the overall message and quality.
        • Use at least three scholarly resources.
        • Your report should be between 6 and 8 pages.
        • Use 12 point, Times New Roman.
         
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