Decisions involving capital expenditures

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Decisions involving capital expenditures

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. Managers must be able to quantitatively analyze different options for capital expenditure to identify the best business decisions. For this Application, you will have the opportunity to utilize the information in this week’s 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 (EXCEL SHEET IS ANOTHER ATTACHMENT), and the spreadsheet you develop should be what you turn in for the assignment

Garrison Appliances Inc.
Read the information below and complete Parts I and II

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.

Part I: Prepare a written report for the board of directors detailing exactly how you computed each item for each proposal and then explain in detail the conclusion you reached regarding the feasibility of each proposal. If the board decides to invest in only one location, explain which one it should be and why.(about 6 detailed paragraphs)

Part II: What other factors should be considered before making a decision and why? (detailed)

MGMT 6170 – Week 6

Given Information Mumbai Given Information Bangalore

Initial cash outlay Initial cash outlay
Useful life Useful life
Net cash inflows excluding depreciation Net cash inflows excluding depreciation
The cost of capital The cost of capital
Tax rate Tax rate

Pg. 380 Mumbai net cash flow Net Income Cash Flow Bangalore net cash flow Net Income Cash Flow
Annual cash savings Annual cash savings
Depreciation Depreciation
Income before tax – Income before tax –
Tax, 40% – – Tax, 40% – –
Net Income $- Net Income $-
Net cash flow $- Net cash flow $-

Mumbai Bangalore

a. Average rate of return on investment a. Average rate of return on investment

Type your formula in this cell and your # in col. D Type your formula in this cell and your # in col. I

b. Payback period b. Payback period

Type your formula in this cell and your # in col. D years Type your formula in this cell and your # in col. I years

c. Net present value c. Net present value
Amount Factor Present value Amount Factor Present value
Initial investment $- $- Initial investment $- $-
Annual net cash inflow for 20 years $- – Annual net cash inflow for 20 years $- –
Net present value $- Net present value $-

Using MS Excel: Using MS Excel:
Initial investment $- Initial investment $-
PV of Annual net cash flow for 20 years PV of Annual net cash flow for 20 years
Net present value ( this # should agree with the # in E33) $- Net present value ( this # should agree with the # in J33) $-

d. Profitability Index d. Profitability Index

Type your formula in this cell and your # in col. D Type your formula in this cell and your # in col. I

e. Internal rate of return e. Internal rate of return

First find your factor. Next, looking at the Present Value of an Annuity of $1 table, look for the intersection of 20 years and the factor. The internal rate of return is: First find your factor. Next, looking at the Present Value of an Annuity of $1 table, look for the intersection of 20 years and the factor. The internal rate of return is:

Using MS Excel: Put your formula in C48 Using MS Excel: Put your formula in I48




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