You, as the project manager, have been asked to recommend which project your company should move forward with. Your company has a total of $350,000 in debt at 5% interest and $400,000 in equity at 12% rate of return. 

 

Project 1 is to build a medium-sized garage for a client over two years. The client will pay $10,000 as a deposit immediately, $40,000 the year after and $85,000 in the final year. Your company has a small loan of $10,000 with 5% interest to go towards this project that must be paid back in the end. $30,000 of materials will be bought all at once in the first year. As well as a piece of equipment that requires a $10,500 down payment and yearly payments of $1500 following. Labor for the project is $15,000 in the first year and $6000 per year after. Administration costs including taxes are $4000 in year one and $1000 per year after. 

 

Project 2 is the purchase and installation of a new piece of equipment for your company with a life span of 3 years. The equipment costs $50,000 up front and $9,000 to run in the following years. You have the same sources of funding (loan and investor's equity) and administration costs as project 1. The equipment will save your company $25,000 beginning the year after installation and has a salvage value of $12,000 at the end of its lifespan. Organize a cashflow forecast for each project beginning at time 0. Make sure to include the net income for each year.

 

Project 1	Year 0	Year 1	Year 2
Beginning cash

Cash Receipts

Client Payments	$Blank 1	$Blank 2	$Blank 3
Investor Proceeds
Other	$Blank 4
Total	$Blank 5	$Blank 6	$Blank 7

Cash Payments

Materials	$Blank 8
Down and monthly payments for equipment	$Blank 9	$Blank 10	$Blank 11
Labor Salary	$Blank 12	$Blank 13	$Blank 14
other	$Blank 15	$Blank 16	$Blank 17
Total	$Blank 18	$Blank 19	$Blank 20
Net	$Blank 21	$Blank 22	$Blank 23

 

 

 

Project 2	Year 0	Year 1	Year 2	Year 3
Beginning cash

Cash Receipts

Savings (revenue)		$Blank 24	$Blank 25	$Blank 26
Investor Proceeds
Other	$Blank 27			$Blank 28
Total	$Blank 29			$Blank 30

Cash Payments

Materials	$Blank 31
other	$Blank 32	$Blank 33	$Blank 34	$Blank 35
Total investment	$Blank 36
Net	$Blank 37	$Blank 38	$Blank 39	$Blank 40

 

 

a) How much is the initial (net) investment of the company for project 1? 

b) How much is the initial (net) investment of the company for project 2? a) Weighted average cost of capital (WACC). b) IRR for both projects c) NPV for both projects d) Discounted payback period for both projects 

2. Based on the information provided, state whether the projects are independent or mutually exclusive, what your recommendation would be and why.

3. If the salvage value was removed from project B and the materials in project A increased by $6,000, would your recommendation change?