Capital Budgeting Decision

Capital Budgeting Analysis Objective: Students demonstrate ability to 1. Utilize several capital budgeting concepts. 2. Complete required calculations. 3. Present written and oral recommendation to senior management based on resulting data. Scenario: HW Enterprises is considering purchasing a new warehouse or expanding overseas. Cost will be $20,000 million for either option. Discount rate for both projects is 9%. Cash inflows for each options are below. Shown in millions: Year Option A: New Warehouse Option B: Expand Overseas $ 5,750 $ 2,000 7,250 6,000 8,500 2,000 10,000 12,000 1 2 3 4 Directions: Utilizing cell references and formulas, use the data in the Excel file provided to prepare A. Calculations - use the tabs provided for details of calculations - move final values to summary tab using cell references 1. Payback period calculation. Textbook page 384 has example. You need to use Excel to make your calculations 2. Net Present Value - work the process step-by-step then utilize the NPV formula under the Formulas, Financials, tab. "See Table 12.4 in text page 386 for example. Note: you will be calculating the NPV using the two methods shown on Table 12.4 Assume 9% as discount rate, 3. Internal Rate of Return and Modified Internal Rate of Return - utilize the IRR and MIRR formulas under the formulas, Financial, tab in Excel. *See Table 12.5 in text page 388 for example. Assume 2% as the reinvestment rate. B. Prepare written report of your team's recommendation to senior management of HW Enterprise. Be ready to discuss recommendation in class. 1. State need for project. 2. Recommendation of option to solve need. 3. Support your recommendation with facts based on your Excel calculations. Refer to computations in Excel file provided as attachment. 5. Close statement by re-stating recommendation. F H B C D E HW Enterprises senior management is trying to determine if they should purchase a new warehouse or expand 2 overseas. Both require a $20,000 million investment Calculate payback period, net present value, IRR, and 3 MIRA. Then develop a recommendation, with explanation, to senior management. The recommendation should 4 bein email-format. Submit Excel file and Word document. 5 Purchase warehouse Expand overseas 6 Initial Investment - Year $20,000,000 $20,000,000 7 Cash Flow Year 1 5,750,000 2,000,000 8 Cash Flow Year 2 7,250,000 6,000,000 9 Cash Flow Year 3 8,500,000 12,000,000 10 Cash Flow Year 4 10,000,000 12,000,000 11 Tatal Cash inflows 31,500,000 32,000,000 22 13 WACC-both options 9% 14 Reinvestment rate 2% 15 16 27 1B 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 + 42 Summary Data Calculation + A G H K Results of Capital Budgeting Analysis Tool Build New 2 Expand Line 3 Payback Net Present Value (NPV) Internal Rate of Return (IRR) 9 Modified Internal Rate of Return (MIRR) 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 Summary Data Calculation References Capital Budgeting Different Risk Levels Analysis Directions F20 Mailings Review View Tell me 321 Aalbcde AaBbcode Normal Na Spacing Aa A MIII 11 III AaBbCcDc AnBb Ceder AaBb A Heading 1 Heading 2 Tida 1. Utilize several capital budgeting concepts. 2. Complete required calculations. 3. Present oral recommendation to senior management based on resulting data. Scenario: HW Enterprises is considering building a new warehouse or expanding overseas. Cost of either option is $20,000 million. Discount rate for building new warehouse is 11%. Senior management determines that risk of expanding overseas is greater. Therefore, discount rate for expanding overseas should be 13.5% Cash inflows for each options are below. Shown in millions: Year Option A: New Warehouse Option B: Expand Overseas $5,750 $ 2,000 2 7,250 6,000 3 8,500 12,000 10,000 12.000 1 4 Directions: Utilizing cell references and formulas, use the data in the Excel file provided to prepare A. Calculations - use the tabs provided for details of calculations - move final values to summary tab using cell references, 1. Payback period calculation Textbook page 384 has example. You need to use Excel to make your calculations 2. Net Present Value - work the process step by step then utilize the NPV formula under the Formulas, Financials, tab. See Table 124 in text page 386 for example, Note: you will be calculating the NPV using the two methods shown on Table 12.4. Use discount rote specified above. 3. Internal Rate of Return and Modified Internal Rate of Return - utilize the IRR and MIRR formulas under the Formulas, Financial, tab in Excel. "See Table 12.5 in text page 388 for example. Assume 2% as the reinvestment rate, B. Prepare written report of your team's recommendation to senior management of HW Enterprise. Be ready to discuss recommendation in dass 1. State how circumstances have changed related to the baseline case. Describe how that changed the results and why 2. Recommend a course of action to senior management 3. Support your recommendation with facts based on your Excel calculations Refer to computations in Excel file provided as attachment 4. Close statement by re-stating recommendation Focus States)