Use capital budgeting tools to determine the quality of three proposed investment projects, and prepare a 6–8 page report that analyzes your computations and recommends the project that will bring the most value to the company.
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Introduction
This assessment is about one of the basic functions of the finance manager, which is allocating capital to areas that will increase shareholder value and add the most value to the company. This means forecasting the projected cash flows of the projects and employing capital budgeting metrics to determine which project, given the forecast cash flows, gives the firm the best chance to maximize shareholder value. As a finance professional, you are expected to:
- Use capital budgeting tools to compute future project cash flows and compare them to upfront costs.
- Evaluate capital projects and make appropriate decision recommendations.
- Prepare reports and present the evaluation in a way that finance and non-finance stakeholders can understand.
Scenario
Senior leadership has now called upon you to analyze three capital project requests based on forecasted cash flow as they relate to maximizing shareholder value.
Your Role
You are one of Maria's high-performing financial analyst managers at ABC Healthcare Corporation and she trusts your work and leadership. Senior leadership was impressed with your presentation in Assessment 1 and they are tasking you with the analysis of these three proposed capital projects based on forecasted cash flow. You have completed forecasting the projected cash flows of the projects as reflected in the attached spreadsheets, Projected Cash Flows [XLSX]. You now need to conduct your analysis recommending which will provide the most shareholder value to the organization.
Requirements
- Use capital budgeting tools to compute future project cash flows and compare them to upfront costs. Remember to only evaluate the incremental changes to cash flows.
- Employing capital budgeting metrics, determine which project, given the forecast cash flows, gives the organization the best chance to maximize shareholder value.
- 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 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. Provide a rationale for your recommendations based on your financial analysis.
- Prepare reports and present the evaluation in a way that finance and non-finance stakeholders can understand.
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 Three Additional States
- Expansion into three additional states 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.
- The marginal corporate tax rate is presumed to be 25%.
- 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%.
Deliverable Format
In this assessment, you will prepare an appropriate evaluation report to senior leadership using sound research and data to defend your decision.
Report requirements:
- Your report should follow the corresponding MBA Academic and Professional Document Guidelines, including single-spaced paragraphs.
- Ensure written communication is free of errors that detract from the overall message and quality.
- Format your paper according to APA style and formatting.
- Use at least three scholarly resources.
- Length: Between 6–8 pages of content beyond the title page, references, and any appendices.
- Use 12 point, Times New Roman.
Evaluation
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies through corresponding scoring guide criteria:
- Competency 1: Apply the theories, models, and practices of finance to the financial management of an organization.
- Use capital budgeting tools to compute future project cash flows and compare them to upfront costs. 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).
- Competency 2: Analyze financing strategies to maximize stakeholder value.
- Evaluate the capital projects using data analysis and applicable metrics that align to the business goals of maximizing shareholder value. Accurately compare the indicated projects with correct computations of capital budgeting tools and then make rational decisions based on the findings.
- Competency 3: Apply financial analyses to business planning and decision making.
- Select the best capital project, based on data analysis and evaluation, that will add the most value for the company. Provide a rationale for your recommendations based on your financial analysis.
- Competency 5: Communicate financial information with multiple stakeholders.
- Prepare an appropriate evaluation report for senior leadership, using sound research and data to defend the decision. Present the evaluation in a way that finance and non-finance stakeholders can understand.
- QUESTION 2 An 8–10 slide presentation to your staff describing your analysis, linking what tools you utilized and why you chose those tools. You will use data to support your evidence-base financial decisions. You will also explain your recommendations to maximize stakeholder value, translating those to tactical outcomes to be implemented by your staff.Collapse All
Introduction
This assessment builds on your prior work in Assessments 1 and 2. It is a presentation to your staff describing you analysis, linking what tools you utilized and why you chose those tools. You will use data to support your evidence-base financial decisions. You will also explain your recommendations to maximize stakeholder value, translating those to tactical outcomes to be implemented by your staff.- Apply the theories, models, and practices of finance to the financial management of an organization.
- Analyze financing strategies to maximize stakeholder value.
- Apply financial analyses to business planning and decision making.
- Use data to support evidence-based financial decisions.
Scenario
The senior leadership has approved your recommendations to move forward. You are now tasked with operationalizing your recommendations. Meeting with your staff, you will translate recommendations to strategies and corresponding tactical objectives. You will explain how you used financial analysis to develop these recommendations, discussing the financial tools you will use to monitor implementation progress.Your Role
You are one of the high-performing financial analyst managers at ABC Healthcare Corporation and are under consideration for a promotion to Director of Operations.Requirements
Follow these steps to complete this presentation:- You are presenting to your staff a summary of the reports presented to senior leadership (Assessments 1 and 2).
- Start by presenting the overall current financial condition of the company as presented to senior leadership (one to two slides).
- Provide an overview of your analysis, linking what tools (financial statements, ratios, industry trends, capital structure) you utilized and why you chose these tools (two slides).
- Link the data used to support your evidence-based financial decisions, providing justification for the recommendations (two slides).
- State the recommendations focused on maximizing stakeholder value into strategies newly adopted by the company, i.e., expansion to a new geographical market, the development of a new dividend policy, changes in capital expenditures, reduction of workforce (one slide).
- Translate those strategies to tactical objectives to be implemented by your staff, noting evidenced-based academic citations (one to two slides).
- Discuss what financial tools you will use to monitor the progress of these tactics (one slide).
Deliverable Format
- Be sure to use a bullet format in your slides but also include detailed narrative supported by relevant literature citations in the notes section.
- Ensure written communication is free of errors that detract from the overall message and quality.
- Use at least three scholarly resources.
- Length: 8–10 content slides in addition to title and reference slides.
- Use 12 point, Times New Roman.
Evaluation
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies through corresponding scoring guide criteria:- Competency 1: Apply the theories, models, and practices of finance to the financial management of an organization.
- Demonstrate an understanding of key financial tools (financial statements, ratios, industry trends, capital structure, competitive analysis) by providing an overview of the analysis used supporting recommendations made in Assessments 1 and 2. Provide a rationale for why tools were utilized.
- Competency 2: Analyze financing strategies to maximize stakeholder value.
- Link the data used to support evidence-based recommendations, translating the recommendations to strategies focused on maximizing stakeholder value.
- Competency 3: Apply financial analyses to business planning and decision making.
- Translate strategies to tactical objectives to be implemented by staff, noting evidenced-based academic citations.
- Competency 4: Use data to support evidence-based financial decisions.
- Evaluate and recommend financial tools to be used to monitor the progress of these tactics.