Question
Evaluating Costs and Benefits Decisions involving capital expenditures often require managers to weigh the costs and benefits of different options related to the same goal
Evaluating Costs and Benefits
Decisions involving capital expenditures often require managers to weigh 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. Similarly in HR management, deciding whether to train from within or outsource involves alternate expenses. Managers must be able to quantitatively analyze different options for capital expenditure to identify the best business decisions having the greatest estimated long term ROI. For this Application, you will have the opportunity to utilize the information in this weeks Resources to make a recommendation in regard to a capital expenditure.
You will set up and use an Excel spreadsheet for all your calculations for the problems below, and the spreadsheet you develop should be what you turn in for the Application. Note: The Resources section includes tutorials for those who might need help in designing and using an Excel spreadsheet.
Garrison Appliances Inc.
Read the information below and complete Parts I,IIand III
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 company 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, 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%
Evaluate each of the proposed locations using each of the following: 1) average rate of return on investment, 2) payback period, 3) net present value, 4) profitability index, and 5) internal rate of return.
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