Reference no: EM133149130

Question: This assignment 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 presentation in the Unit 2 assignment 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.

Requirements
Use capital budgeting tools to compute future project cash flows and compare them to upfront costs. Remember to only evaluate the incremental changes to cash flows.

Employing capital budgeting metrics, determine which project, given the forecast cash flows, gives the organization the best chance to maximize shareholder value.

Demonstrate knowledge of a variety of capital budgeting tools including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The analysis of the capital projects will need to be correctly computed and the resulting decisions rational.

Evaluate capital projects and make appropriate decision recommendations. Accurately compare the indicated projects with correct computations of capital budgeting tools and then make rational decisions based on the findings.

Select the best capital project, based on data analysis and evaluation, that will add the most value for the company. Provide a rationale for your recommendations based on your financial analysis.

Prepare reports and present the evaluation in a way that finance and non-finance stakeholders can understand.

Project A: Major Equipment Purchase
A new major equipment purchase, which will cost $10 million; however, it is projected to reduce cost of sales by 5% per year for 8 years.
The equipment is projected to be sold for salvage value estimated to be $500,000 at the end of year 8.
Being a relatively safe investment, the required rate of return of the project is 8%.
The equipment will be depreciated at a MACRS 7-year schedule.
Annual sales for year 1 are projected at $20 million and should stay the same per year for 8 years.
Before this project, cost of sales has been 60%.
The marginal corporate tax rate is presumed to be 25%.
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% per year for 5 years.
Annual sales for the previous year were $20 million.
Start-up costs are projected to be $7 million and an upfront needed investment in net working capital of $1 million. The working capital amount will be recouped at the end of year 5.
The marginal corporate tax rate is presumed to be 25%.
Being a risky investment, the required rate of return of the project is 12%.
Project C: Marketing/Advertising Campaign
A major new marketing/advertising campaign, which will cost $2 million per year and last 6 years.
It is forecast that the campaign will increase sales/revenues and costs of sales by 15% per year.
Annual sales for the previous year were $20 million.
The marginal corporate tax rate is presumed to be 25%.
Being a moderate risk investment, the required rate of return of the project is 10%.
Deliverable Format
In this assignment, you will prepare an appropriate evaluation report to senior leadership using sound research and data to defend your decision.

Report requirements:
Your report should follow the corresponding MBA Academic and Professional Document Guidelines, including single-spaced paragraphs.
Ensure written communication is free of errors that detract from the overall message and quality.
Format your paper according to APA style and formatting.
Use at least three scholarly resources.
Length: Between 6-8 pages of content beyond the title page, references, and any appendices.
Use 12 point, Times New Roman.
Evaluation
By successfully completing this assignment, you will demonstrate your proficiency in the following course competencies through corresponding scoring guide criteria:

Competency 1: Apply the theories, models, and practices of finance to the financial management of an organization.
Use capital budgeting tools to compute future project cash flows and compare them to upfront costs. Demonstrate knowledge of a variety of capital budgeting tools, including net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI).

Competency 2: Analyze financing strategies to maximize stakeholder value.
Evaluate the capital projects using data analysis and applicable metrics that align to the business goals of maximizing shareholder value. Accurately compare the indicated projects with correct computations of capital budgeting tools and then make rational decisions based on the findings.

Competency 3: Apply financial analyses to business planning and decision making.
Select the best capital project, based on data analysis and evaluation, that will add the most value for the company. Provide a rationale for your recommendations based on your financial analysis.

Competency 5: Communicate financial information with multiple stakeholders.

Prepare an appropriate evaluation report for senior leadership, using sound research and data to defend the decision. Present the evaluation in a way that finance and non-finance stakeholders can understand.

Your course instructor will use the scoring guide to review your deliverable in the role of your boss and stakeholders. Review the scoring guide prior to developing and submitting your assignment.

ePortfolio
This assignment shows potential employers and clients that you can analyze capital projects to determine whether and how they can provide value to shareholders. Include this in your personal ePortfolio.

Risk is an important aspect of business and investment. The impact of risk needs to be measured on all capital projects and investments. In fact, most accomplished investors consider the measure and management of risk to be more important than the consideration of investment return. If risk is considered effectively, the returns will tend to take care of themselves.

To gain a full understanding of the impact of risk on the success or failure of capital projects, you can see the different views of risk and that all should be considered. For this discussion, you are a financial analyst of a mid-sized corporation, and the CFO has come to you with a pet investment project. The CEO has done a preliminary analysis using NPV, IRR, payback period, and PI, and it appears to be a worthy project that should add significant value to the firm. However, the CFO has a feeling that the CEO has failed to incorporate risk into the analysis. He has asked you do some risk analysis of the project to see if that will alter the final decision to invest or not.

Prepare a post that responds to these questions:

What type of risk analysis would you incorporate into your analysis?
How reliable are these analyses?
Make sure you provide examples and resources to support your statements.

Response Guidelines
Read the posts submitted by your fellow learners, and prepare a response to at least two other learners. You may use these ideas to craft substantive response posts:

Raise additional points not considered, and explain the relevance.
Identify gaps you noticed in the logic or argument.
Suggest other ways of thinking about or uses for the ideas or information.
Connect ideas to your own experiences and observations to elaborate on the main ideas.
Come up with your own way to "dig deeper" into the posts.
Whether in academia or in a professional setting, you should strive to support your thoughts and ideas with current research and cite your sources using APA style.