Application: A Letter to the Board of Directors

Decisions involving capital expenditures often require managers to weight the costs and benefits of different options related to the same goal or project. For instance, deciding whether to replace, repair, or do nothing to existing equipment is a capital expenditure decision that involves calculations, projections, and deliberations. Managers must be able to quantitatively analyze different options for capital expenditures to make the best decisions for their organization.

For this Assignment, review the information in the scenario presented. You will utilize the information in this week?s resources and media to make a recommendation in regard to a capital expenditure.

Garrison Appliances, Inc.

Garrison Appliances, Inc. is considering expanding its international presence. It sells 25% of all the toaster ovens sold in the United States but only 3% of the toaster ovens sold outside of the United States. The organization believes that it can sell more of its product if it has a production facility located overseas. Estimates concerning two possible locations, Mumbai and Bangalore, India follow:

Possible Location

Mumbai

Bangalore

Initial cash outlay

$5,000,000

$2,800,000

Useful life

20 years

20 years

Net cash inflows excluding depreciation

$1,100,000

$860,000

The cost of capital

9%

9%

Tax rate

40%

40%

The Assignment:

• Part 1:Prepare a spreadsheet using Excel or a similar program in which you compute the following for each proposed location:
  • Accounting rate of return on investment
  • Payback
  • Net present value
  • Internal rate of return

Note:Be sure to view the media for this week before starting this Assignment.

• Part 2:Utilizing Word or another word processing software program, prepare a written report for the Board of Directors. The intended audience is clear from the salutation and the language used throughout the report.
  • nclude a detailed and thorough explanation of the conclusion you reached regarding the feasibility of each proposal supported by the calculations prepared in Part 1.
  • Explain at leastfive non-financial items (e.g., culture, language, etc.), which may impact the perceived desirability of each location.
  • Select the one location you recommend the Board invest in. Explain your rationale in precise and detailed language.

Submityour Application (both your Excel and Word files) byDay 7.

To submit your Assignment, do the following:

• Save Part 1 of your Assignment as a ?.xls? file with the filename ?WK3AssgnP1+last name+first initial.xls?. Sally Ride?s filename would be ?WK3AssgnP1RideS.xls?.
• Save Part 2 of your Assignment as a ?.doc? file with the filename ?WK3AssgnP2+last name+first initial.doc?. Sally Ride?s filename would be ?WK3AssgnP2RideS.doc?.

Week 3 Template Given Information Mumbai Initial cash outlay Useful life Operating income The cost of capital Tax rate Mumbai net cash flow Operating income Depreciation Net Income before taxes Tax, 40% Net Income Net cash flow $ 5,000,000 20 1,100,000 9% 40% Net Income Cash Flow 250,000 $ - $ - Average net income and average book value of investment Year Net Income Avg BV of Investment 1 $ 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Average $ #DIV/0! Mumbai a. Average rate of return on investment Type the formula here. Put the answer in D49 b. Payback period Type the formula here. Put the answer in D53 c. years Net present value - using table page 126 Amount Initial investment Annual net cash flow for 20 years Net present value Using MS Excel: Initial investment PV of Annual net cash flow for 20 years Net present value d. Internal rate of return Factor 1 9.129 Present value $ $ - $ - Using MS Excel: Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 stment Given Information Bangalore Initial cash outlay Useful life Operating income The cost of capital Tax rate Bangalore net cash flow Operating income Depreciation Net Income before taxes Tax, 40% Net Income Net cash flow $ Net Income 2,800,000 20 860,000 9% 40% Cash Flow 140,000 $ - $ - Average net income and average book value of investment Year Net Income Avg BV of Investment 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Average #DIV/0! Bangalore a. Average rate of return on investment Type the formula here. Put the answer in I49 b. Payback period Type the formula here. Put the answer in I53 c. years Net present value - using table page 126 Amount Initial investment Annual net cash flow for 20 years Net present value Using MS Excel: Initial investment PV of Annual net cash flow for 20 years Net present value e. Internal rate of return Factor 1 9.129 Present value $ $ - $ - Using MS Excel: Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 Err:523 Compatibility Report for Copy of Week 3 Template-1.xls Run on 6/2/2015 13:42 The following features in this workbook are not supported by earlier versions of Excel. These features may be lost or degraded when opening this workbook in an earlier version of Excel or if you save this workbook in an earlier file format. Minor loss of fidelity Some cells or styles in this workbook contain formatting that is not supported by the selected file format. These formats will be converted to the closest format available. # of occurrences 27 Version Excel 97-2003 Week 3 Template Given Information Mumbai Initial cash outlay Useful life Operating income The cost of capital Tax rate $ 5,000,000 20 1,100,000 9% 40% Mumbai net cash flow Operating income Depreciation Net Income before taxes Tax, 40% Net Income Net cash flow Net Income $ 1,100,000 $ Cash Flow 1,100,000 250,000 $ 850,000 340,000 510,000 340,000 $ 760,000 250000 Average net income and average book value of investment Year Net Income Avg BV of Investment 0 1 $ 510,000 $ 4,750,000 2 510,000 $ 4,500,000 3 510,000 $ 4,250,000 4 510,000 $ 4,000,000 5 510,000 $ 3,750,000 6 510,000 $ 3,500,000 7 510,000 $ 3,250,000 8 510,000 $ 3,000,000 9 510,000 $ 2,750,000 10 510,000 $ 2,500,000 11 510,000 $ 2,250,000 12 510,000 $ 2,000,000 13 510,000 $ 1,750,000 14 510,000 $ 1,500,000 15 510,000 $ 1,250,000 16 510,000 $ 1,000,000 17 510,000 $ 750,000 18 510,000 $ 500,000 19 510,000 $ 250,000 20 510,000 $ Average $ 510,000 $ 2,375,000 Mumbai a. Average rate of return on investment b. Type the formula here. Put the answer in D49 Net profit/ Total investment Payback period 21.5% Type the formula here. Put the answer in D53 c. Net present value - using table page 126 Initial investment Annual net cash flow for 20 years Net present value Using MS Excel: Initial investment PV of Annual net cash flow for 20 years Net present value d. 6.6 years Internal rate of return Amount $ 5,000,000 $ 760,000 Factor 1 9.129 Present value $ 5,000,000 6,938,040 $ 11,938,040 $ $ 5,000,000 45,642,728 50,642,728 Using MS Excel: 14% Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 IRR (5,000,000) 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 stment Given Information Bangalore Initial cash outlay Useful life Operating income The cost of capital Tax rate Bangalore net cash flow Operating income Depreciation Net Income before taxes Tax, 40% Net Income Net cash flow $ 2,800,000 20 860,000 9% 40% Net Income $ 860,000 $ Cash Flow 860,000 140,000 $ 720,000 288,000 432,000 288,000 $ 572,000 Average net income and average book value of investment Year Net Income Avg BV of Investment 1 432,000 $ 2,660,000 2 432,000 2,520,000 3 432,000 2,380,000 4 432,000 2,240,000 5 432,000 2,100,000 6 432,000 1,960,000 7 432,000 1,820,000 8 432,000 1,680,000 9 432,000 1,540,000 10 432,000 1,400,000 11 432,000 1,260,000 12 432,000 1,120,000 13 432,000 980,000 14 432,000 840,000 15 432,000 700,000 16 432,000 560,000 17 432,000 420,123 18 432,000 280,000 19 432,000 140,000 20 432,000 Average 432,000 $ 1,330,006 Bangalore a. Average rate of return on investment 3.1 b. Type the formula here. Put the answer in I49 NetProfit divide by total investment Payback period Type the formula here. Put the answer in I53 4.9 years c. Net present value - using table page 126 Initial investment Annual net cash flow for 20 years Net present value Using MS Excel: Initial investment PV of Annual net cash flow for 20 years Net present value e. Internal rate of return Amount $ 2,800,000 $ 572,000 Factor 1 9.129 Present value $ 2,800,000 5,221,788 $ 8,021,788 $ $ 2,800,000 572,000 3,372,000 Using MS Excel: 20% Period 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 (2,800,000) 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 Compatibility Report for Copy of Week 3 Template-1.xls Run on 6/2/2015 13:42 The following features in this workbook are not supported by earlier versions of Excel. These features may be lost or degraded when opening this workbook in an earlier version of Excel or if you save this workbook in an earlier file format. Minor loss of fidelity Some cells or styles in this workbook contain formatting that is not supported by the selected file format. These formats will be converted to the closest format available. # of occurrences 27 Version Excel 97-2003 Comparsion of Investment Mumbai Bangalore $ (5,000,000) $ (2,800,000) 20 20 $ 1,100,000 $ 860,000 9% 9% 40% 40% Initial Cash Outlay Useful Life Operating Income The Cost of Capital Tax Rate Operating income Depreciation Net Income before taxes Tax @ 40% Net Income Net cash flow (Net Income + Depreciation) $ $ Average Net Income Average Book Value of Investment Accounting Rate of Return on Investment $ $ Payback Period 1,100,000 $ 250,000 850,000 340,000 510,000 760,000 $ 860,000 140,000 720,000 288,000 432,000 572,000 510,000 $ 2,500,000 $ 20.40% 432,000 1,400,000 30.86% 6.58 Calculation of Net Present Value Initial investment PV of Annual net cash flow for 20 years Net present Value $ $ $ 5,000,000 $ 6,937,695 $ 1,937,695 $ 4.90 2,800,000 5,221,528 2,421,528 Calculation of Inetrnal rate of Return 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 ($5,000,000) 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 ($2,800,000) 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 19 20 Internal Rate of return (IRR) 760,000 760,000 14.12% 572,000 572,000 19.89% Comparsion of Investment Mumbai Bangalore $ (5,000,000) $ (2,800,000) 20 20 $ 1,100,000 $ 860,000 9% 9% 40% 40% Initial Cash Outlay Useful Life Operating Income The Cost of Capital Tax Rate Operating income Depreciation Net Income before taxes Tax @ 40% Net Income Net cash flow (Net Income + Depreciation) $ $ Average Net Income Average Book Value of Investment Accounting Rate of Return on Investment $ $ Payback Period 1,100,000 $ 250,000 850,000 340,000 510,000 760,000 $ 860,000 140,000 720,000 288,000 432,000 572,000 510,000 $ 2,500,000 $ 20.40% 432,000 1,400,000 30.86% 6.58 Calculation of Net Present Value Initial investment PV of Annual net cash flow for 20 years Net present Value $ $ $ 5,000,000 $ 6,937,695 $ 1,937,695 $ 4.90 2,800,000 5,221,528 2,421,528 Calculation of Inetrnal rate of Return 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 ($5,000,000) 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 760,000 ($2,800,000) 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 572,000 19 20 Internal Rate of return (IRR) 760,000 760,000 14.12% 572,000 572,000 19.89%