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%. Your Role You are a finance manager at Drill Tech, Inc., who plays a major role in reviewing capital project requests. 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. ◦Use budgeting tools to compute future project cash flows and compare them to upfront costs. Remember to only evaluate the incremental changes to cash flows. ◦Demonstrate knowledge of a variety of capital budgeting tools including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The analysis of the capital projects will need to be correctly computed and the resulting decisions rational. •Evaluate the capital projects using data analysis and applicable metrics that align to the business goal of maximizing shareholder value. ◦Evaluate capital projects and make appropriate decision recommendations. Accurately compare the indicated projects with correct computations of capital budgeting tools and then make rational decisions based on the findings. •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. ◦Justify your decision with a clear analysis showing the findings of the analysis and which project has the best chance to increase shareholder value. ◦Use your calculations and data to provide a clear picture of why your recommendation is the right one. This goes beyond just regurgitating the data. Think about how the data can tell the story that will be meaningful to the readers
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