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Genesis Energy Capital Plan Report Student name Institution Genesis Energy Capital Plan Report The criteria that the is to be used in the ranking of the investment will include the use of the time value of money concept especially the net present values, the payback periods as well as the internal rate of return. The net present value concept discounts the future incomes using the expected rate of return to arrive at the value of these incomes in today's terms. The payback period estimates the time that an investment will take to recoup the initial investments using the projected inflows. The internal rate of return is the area that the firm expects the investments to generate returns at (Kinney & Raiborn, 2012) Calculation of the weighted average cost of capital The weighted average cost of capital is the cost that the firm incurs after deduction the taxes for the financial sources that the firm is using. This cost is achieved after the multiplying of the cost of the capital with the weight or the average percentage that the cost is contributing in the capital structure of the firm. Usually each firm is financed by either the debt or the equity (Mitra, 2009) In genesis, the total debt of the firm stands at $1. 7 million in comparison to the owners total equity that stands at $2 million. The two sources of finance account for 46 and 54% in debt and equity respectively. The firm incurs the cost of acquiring the equity finance at 2 percent in comparison to the 6.59 of the debt finance. This therefore means that the two sources contribute to the working capital as flows Debt finance weighted = cost * percentage = 6.59*0.46= 3.03 Weighed cost of equity= cost * percentage= 0.02*0.54= 1.08 To arrive at the weighted average cost of the firm, we then have to sum up the two cost. WACC of genesis= weighted cost of debt + weighted cost of equity =3.03+1.08= 4.11 This implies that the average weighted cost of the capital in Genesis is 4. 11% Metrics Since the metrics to be used for the evaluation are the Net present value (NPV), the payback period (PBP), and the internal rate of return (IRR), there is a need to rank these metrics. The first priority to be given in the ranking will be the NPV. The consideration in this case will be that the project with a higher NPV is the most considerable. However, for any project to be deemed as viable, it must have a positive NPV. Negative value of the NPV is an indication of loses in the firm The second priority will be accorded to the IRR, as this is the rate at which the firm is expecting the projects to generate returns. This is also the rate that the firm is going to use in the discounting cash flows for the calculation of the NPV. A project with a higher positive IRR will be the most desirable The PBP will be the last metric to consider. This is the time, in years, that the project will take to pay the initial investment made by the firm. Since this is an investment, the project with the shortest PBP will be the most desirable since the risk of the investment will only take a short time. The ranking therefore will follow the procedure where they are first ranked on NPV followed by the IRR and finally the PBP Recommendations The recommendation is for genesis investments are made based on the above metrics for ranking. There are three items for consideration. These are the facility, Equipment and the inspection. The recommendation is as follows Facility According to the NPV, the facility has the following NPV Project A: 25-emp facility Project B: 40-emp facility Project C: 75-emp facility 1303 3323 4595 10.5 15.96 16.75 8 7 7 Project A with an initial investment of $2000 will generate a Net of $1303 at the end of the ten years. Project B will generate $3323 and require an initial invent of $2500. Project C on the other hand requires $3000 initial investment but will generate $4595. This therefore means that the most viable project is Project c Based on IRR, the project has the following rates Project A: 25-emp facility Project B: 40-emp facility Project C: 75-emp facility 10.05 15.96 16.75 Project C is the most viable since it has the highest rate of return at 16. 75 The Payback period of the facility is as follows Project A: 25-emp facility Project B: 40-emp facility Project C: 75-emp facility 8 years 7 years 7 years Both project C and B quality from selection since they a have a shorter PBP of 7 years The facility that is the most recommended for selection is the facility C which has a shorter PBP of 7 years, a higher IRR as 16.75 and has the highest NPV rate at $4595. This implies that facility C Will take a shorter period of for the firm to recoup its initial $3000 investments but will, also within the ten years, generate a high net return for the investment. Equipment There are the three types of equipment that the firm is considering for investment into Equipment one Under equipment one, there are three levels of equipment that are in consideration. The automatic, semi-automatic, as well as the manual equipment and their analysis is as follows Equipment 1 - fully automatic NPV 2,081 IRR 17.95 % PBP 6 Equipment 1 - semi-automatic 1,630 19.00% 6 Equipment 1 - manual 2,638 33.35% 5 The NPV of the three equipment indicate that the automatic equipment will take 6 years to make returns of the invested amounts and will have an IRR of 17.97 and an NPV of 2081. The semi-automatic equipment will take 6 years at the rate of 19 % and an NPV of $1630. The manual equipment will have the highest NPV of $2638 at the rate of 33.35% and will take the shortest period of 5 years. This implies that the manual equipment is the most conducive form investment into as it has the highest NPV, IRR and will take the shortest time to recoup back the investment Equipment Two There are two equipment under the category 2. These are the standard and the top of line equipment standard NPV 2436 IRR 28.02 % PBP 5 top of line equipment 4932 28.87% 6 The top of line equipment has the highest NPV and IRR but will take one year longer to recoup the investment. The standard equipment takes 5 years to recoup the investment at the IRR rate of 28.02 but a lower NPV of $2436. The top of the line equipment is therefore the most viable and is therefore selected for investment Equipment three The third level of machines that are to be considered for investment by genesis are based on the man hours, they are the 2 man machines, 3 man machines and the 5 man machine equipment. The initial investment of the machines is $600, $700, and $750 respectively. Their analysis is as follows 3 MAN MACHINE NPV (267) IRR -4.15% PBP not breaking even 2 MAN MACHINE (413) -13.28% not breaking even 5 MAN MACHINE (289) -3.55% not breaking even Under the equipment three category, all the machines will not be able to break even to pay the initial investment in the machines. The IRR of the three machines are al negative and therefore undesirable. The NPV of the entire machine are also negative The decision of the machine under equipment three is that there is none of the machines is to be selected for investment. This is because not all the machines will be able to pay back the investments, have negative NV's, and have negative IRR. Inspection Inspection is an important aspect that a firm has to consider. Genesis is considering two option for inspection. These are the in-house based or the contract inspection. In house inspection requires an initial investment of $1800. The analysis include In-House inspection NPV 2,604 IRR 21.83 % PBP 6 Contract inspection 721 Infinite At start of contract The contract inspection is the best alternative for investment. This is because there is no initial cost of investment. The IRR of the contract inspection is almost infinite and the contract inspection, since it has non initial investment, the PBP is as the project is starting of the contract. The total cost of the investment After the analysis, the choice of the area to invest is the combination involving facility C, manual equipment, top of line equipment and a contract inspection. This combination will have the following key characteristic In-House inspection NPV IRR PBP 5258 22.46% 6 Initial investment 7050 The total initial investment that genesis will have to invest is $7050 that will be paid back in 6 years. The IRR of the investment will be at 22.46 and an NPV of $5258. This combination has been chosen combination has come because of the usage of the NPV, the internal rate of return as well as the payback period. References Kinney, M., & Raiborn, C. (2012). Cost Accounting: Foundations and Evolutions. Cengage Learning. Mitra, J. K. (2009). Advanced Cost Accounting. New Age International