21 Jun Create an Excel spreadsheet in which you use capital
Create an Excel spreadsheet in which you use capital budgeting tools to determine the quality of 3
proposed investment projects, as well as a 6-8 page report that analyzes your computations and
recommends the project that will bring the most value to the company.
Introduction
This portfolio work project is about one of the basic functions of the finance manager: allocating capital
to areas that will increase shareholder value. There are many uses of cash managers can select from, but
it is essential that the selected projects are ones that 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 business 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
You work as a finance manager for Drill Tech, Inc., a mid-sized manufacturing company located in
Minnesota. Three capital project requests were identified as potential projects for the company to
pursue in the upcoming fiscal year. In the meeting to discuss capital projects, the director of finance (and
your boss), Jennifer Davidson, gives you a synopsis of the projects along with this question: Which one of
these projects will provide the most shareholder value to the company?
She also tells you that other than what is noted in each project scenario, all other costs will remain
constant, and you should remember to only evaluate the incremental changes to cash flows.
The proposed projects for you to review are as follows.
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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 Europe
• Expansion into Western Europe 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.
• Because of the higher European tax rate, the marginal corporate tax rate is presumed to be 30%.
• 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%.
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