The quality of three proposed investment projects

Evaluation of Capital Projects

Number of sources: 4
Paper instructions:

Use capital budgeting tools to determine the quality of three proposed investment projects, and prepare a 6–8 page report that analyzes your computations and recommends the project that will bring the most value to the company.

Introduction
This assessment is about one of the basic functions of the finance manager, which is allocating capital to areas that will increase shareholder value and add the most value to the company. This means forecasting the projected cash flows of the projects and employing capital budgeting metrics to determine which project, given the forecast cash flows, gives the firm the best chance to maximize shareholder value. As a finance professional, you are expected to:

Use capital budgeting tools to compute future project cash flows and compare them to upfront costs.
Evaluate capital projects and make appropriate decision recommendations.
Prepare reports and present the evaluation in a way that finance and non-finance stakeholders can understand.

Scenario
Senior leadership has now called upon you to analyze three capital project requests based on forecasted cash flow as they relate to maximizing shareholder value.

Your Role
You are one of Maria’s high-performing financial analyst managers at ABC Healthcare Corporation, and she trusts your work and leadership. Senior leadership was impressed with your Financial Condition Analysis presentation (Assessment 1) and they are tasking you with the analysis of these three proposed capital projects based on forecasted cash flow. You have completed forecasting the projected cash flows of the projects as reflected in the attached spreadsheets. You now need to conduct your analysis, recommending which will provide the most shareholder value to the organization.

Instructions
In this assessment, you will prepare an appropriate evaluation report to senior leadership using sound research and data to defend your decision. As a finance professional, you are expected to:

Describe the various capital budgeting tools (including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI) used in the results provided in the Project Cash Flows [XLXS] document), and indicate for each tool what type of results would support positive or negative decisions.
Evaluate the capital projects using the given budgeting tool results in in the Project Cash Flows [XLXS] document and make the appropriate project choice/recommendation that will add the most value for the company’s shareholders. (Only one project should be selected.)
Provide a rationale for your recommendation based on your evaluation.
Prepare an evaluation report for senior leadership, supported by the data and research, and present the evaluation in a way that finance and non-finance stakeholders can understand.
Whatever format you choose, be sure it is organized and clear, and communicates effectively.
Project A: Major Equipment Purchase
A new major equipment purchase, which will cost 10 million dollars; however, it is projected to reduce cost of sales by 5 percent per year for 8 years.
The equipment is projected to be sold for salvage value estimated to be 500,000 dollars at the end of year 8.
Being a relatively safe investment, the required rate of return of the project is 8 percent.
The equipment will be depreciated at a MACRS 7-year schedule.
Annual sales for year 1 are projected at 20 million dollars and should stay the same per year for 8 years.
Before this project, cost of sales has been 60 percent.
The marginal corporate tax rate is presumed to be 25 percent.
Project B: Expansion Into Three Additional States
Expansion into three additional states has a forecast to increase sales/revenues and cost of sales by 10 percent per year for 5 years.
Annual sales for the previous year were 20 million dollars.
Start-up costs are projected to be 7 million dollars and an upfront needed investment in net working capital of 1 million dollars. The working capital amount will be recouped at the end of year 5.
The marginal corporate tax rate is presumed to be 25 percent.
Being a risky investment, the required rate of return of the project is 12 percent.
Project C: Marketing/Advertising Campaign
A major new marketing/advertising campaign, which will cost 2 million dollars per year and last 6 years.
It is forecast that the campaign will increase sales/revenues and costs of sales by 15 percent per year.
Annual sales for the previous year were 20 dollars million.
The marginal corporate tax rate is presumed to be 25 percent.
Being a moderate risk investment, the required rate of return of the project is 10 percent.

Additional Requirements

Written communication: Ensure written communication is free of errors that detract from the overall message and quality.
APA format: Format your paper according to current APA style and formatting.
References: Use at least three scholarly resources.
Length: 6–8 pages of content, in addition the title page, references, and appendices.
Font and font size: Use Times New Roman, 12 point.

Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies and scoring guide criteria:

Competency 1: Apply the models and practices of finance to the financial management of an organization.
Describe various capital budgeting tools (including NPV, IRR, payback period, and PI) and indicate for each tool what type of results would support positive or negative decisions.
Competency 2: Analyze financing strategies to maximize stakeholder value.
Evaluate capital projects using data analysis and applicable metrics, and make the appropriate recommendation that will add the most value for the company’s shareholders.
Competency 5: Communicate financial information with multiple stakeholders.
Prepare an evaluation report for senior leadership, supported by the data and research, and present the evaluation in a way that finance and non-finance stakeholders can understand.
Write coherently to support a central idea with correct grammar, usage, and mechanics as expected of a business professional.

Scoring Guide
Use the scoring guide to understand how your assessment will be evaluated.

Criterion 1
Describe various capital budgeting tools (including NPV, IRR, payback period, and PI) and indicate for each tool what type of results would support positive or negative decisions.
Distinguished
Describes various capital budgeting tools (including NPV, IRR, payback period, and PI) and indicates for each tool what type of results would support positive or negative decisions, providing examples.

Criterion 2
Evaluate capital projects using data analysis and applicable metrics, and make the appropriate recommendation that will add the most value for the company’s shareholders.
Distinguished
Evaluates capital projects using data analysis and applicable metrics, and makes the appropriate recommendation that will add the most value for the company’s shareholders. Provides a rationale for the recommendation based on an accurate evaluation.

Criterion 3
Prepare an evaluation report for senior leadership, supported by the data and research, and present the evaluation in a way that finance and non-finance stakeholders can understand.
Distinguished
Prepares an evaluation report for senior leadership, supported by the data and research, and presents the evaluation in a way that finance and non-finance stakeholders can understand, and using examples.

Criterion 4
Write coherently to support a central idea with correct grammar, usage, and mechanics as expected of a business professional.
Distinguished
Writing is coherent and consistently appropriate, using evidence to support a central idea and with correct grammar, usage, and mechanics as expected of a business professional.

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