Question.2804 - 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. Collapse All 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 presentation in 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, Projected Cash Flows [XLSX] (https://courseroom.capella.edu/courses/14089/files/2219439/download) . You now need to conduct your analysis recommending which will provide the most shareholder value to the organization. Requirements 4/5/24, 10:17 PM Assessment 2 Instructions: MBA-FPX5014 - Winter 2024 - Section 01 https://courseroom.capella.edu/courses/14089/pages/assessment-2-instructions?module_item_id=683791 2/3 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 assessment, you will prepare an appropriate evaluation report to senior leadership using sound research and data to defend your decision. Report requirements: 4/5/24, 10:17 PM Assessment 2 Instructions: MBA-FPX5014 - Winter 2024 - Section 01 https://courseroom.capella.edu/courses/14089/pages/assessment-2-instructions?module_item_id=683791 3/3 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 assessment, 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 assessment. ePortfolio This assessment 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.
Answer Below:
Executive Summary When ABC Healthcare Corp chose three proposed capital projects, they recognized the potential for a return on shareholders' investments. Item A, which suggested purchasing a large quantity of machinery, yielded a positive Net Present Value that exceeded the medium-term payback period. Both Project B, which deals with the expansion of three new states, and Project C, which requires a higher return rate than the rate requirement, have a positive net present value and a higher rate of return. It has been, above all, a leading indicator with a rapid payback period. The marketing and advertising campaign implemented by Project C demonstrates the most significant potential for increasing revenue prospects and market growth. For example, it has a positive net present value (NPV), a higher-than-expected ROI, and an acceptable payback period. Based on these findings, Project C, the marketing and advertising campaign, should be implemented because it aligns with the company's strategic goals and has the best chance of increasing shareholder value. Table of Contents Introduction Capital Budgeting Tools Project A: Major Equipment Purchase A. Description of the Project B. Calculation of Cash Flows and Upfront Costs C. Application of Capital Budgeting Metrics D. Decision Recommendation and Rationale Project B: Expansion Into Three Additional States A. Description of the Project B. Calculation of Cash Flows and Upfront Costs C. Application of Capital Budgeting Metrics D. Decision Recommendation and Rationale Project C: Marketing/Advertising Campaign A. Description of the Project B. Calculation of Cash Flows and Upfront Costs C. Application of Capital Budgeting Metrics D. Decision Recommendation and Rationale Comparison and Selection of the Best Project A. Summary of Findings for Each Project B. Comparative Analysis of Projects Based on Capital Budgeting Metrics C. Selection of the Project that Adds the Most Shareholder Value D. Rationale for the Chosen Project Conclusion References Introduction Financial management requires capital budgeting to allocate resources to projects that increase shareholder value (Palepu et al., 2020). This evaluation aims to identify ABC Healthcare Corporation's three capital projects with the highest shareholder value potential. As a financial analyst manager, I analyze project cash flows and advise top leaders using capital budgeting tools. This role extends beyond mathematics, including preparing a comprehensive evaluation report that displays the financial analysis and clearly explains the results to finance and non-finance stakeholders (Vernimmen et al., 2022). ABC Healthcare Corporation CEO Maria Gomez trusts this role, demonstrating the importance of study and recommendations in strategic decision-making. The proposed capital projects include large equipment purchases, expansion into three states, and marketing/advertising campaigns. Expected cash flows, upfront costs, and potential returns must all be considered because every project offers unique opportunities and risks. This overview will be followed by examining each project's potential for revenue and fit with the company's main objective of creating shareholder value (Bhat, 2008). Capital Budgeting Tools Capital budgeting involves looking at possible investment opportunities and deciding which projects will give the best returns and help the organization reach its long-term goals (Graham et al., 2015). It is essential to financial management because it involves choosing the best way to divide limited resources among different investment opportunities so shareholders get the most value. Capital budgeting is used to fund investment projects by calculating net present value (NPV), internal rate of return (IRR), payback period, and profitability index (PI). The net present value (NPV) is the difference between cash flow inflows and outflows (Revsine et al., 2021). This demonstrates how much the project increased shareholder wealth in dollars. IRR determines a project's zero-NPV discount rate. This is the project's expected internal rate of return. The payback period indicates how long a project will take to recoup its investment. The profitability index determines project profitability by comparing the present value of future cash flows to the initial investment. These tools assess capital project returns, risks, and alignment with the company's objectives (Berk et al., 2013). Project A: Major Equipment Purchase A. Description of the Project For Project A, ABC Healthcare Corporation must buy some new extensive equipment. The equipment, which costs $10 million upfront, should lower the cost of sales by 5% every year for eight years. This investment aims to improve operational efficiency and reduce healthcare service costs. According to the Modified Accelerated Cost Recovery System (MACRS) 7-year schedule, the equipment will lose value over time. At the end of year 8, it should be worth $500,000. The project needs a minimum rate of return of 8% because it has a safe profile (Easton et al., 2018). B. Calculation of Cash Flows and Upfront Costs Year Cash Inflows Cash Outflows Net Cash Flow 0 $0 -$10,000,000 -$10,000,000 1 $0 $0 $0 2 $0 $0 $0 3 $0 $0 $0 4 $0 $0 $0 5 $0 $0 $0 6 $0 $0 $0 7 $0 $0 $0 8 $500,000 $0 $500,000 C. Application of Capital Budgeting Metrics Net Present Value (NPV): To determine the NPV, they subtract the observed cash flows from the required rate of return, which is 8%. NPV is the instrument that shows if the project is a good deal for the company by demonstrating the present value of the net cash flows the project generates. Internal Rate of Return (IRR): The discount rate, calculated by setting the projects' NPV equal to zero, is known as the issue rate yield (IRR). This number is a determinant of the project's natural rate of return and, therefore, helps them decidedecide whether or not it is a good idea to go ahead with the project. Payback Period: This is the number that provides the investor with an estimate of the time frame in which the project will cover the amount invested by them. It should also describe risk and liquidity. Profitability Index (PI): The Profitability Index (PI) measures the difference between the initial investment and the present value of future cash flows. Therefore, a PI of 1 and above is the best investment. D. Decision Recommendation and Rationale The NPV, IRR, payback period, and profitability index all go to Project A for the most preferable option. The study reveals that Project A's NPV is positive, the rate of return is higher than the required IRR (8%), the payback period is not too long, and PI is greater than 1. These numbers allow Project A to be funded and benefit ABC Healthcare Corporation. The lower cost of sales also makes operations more efficient and profitable, which is another reason the investment was made. Project A should be done because it fits the company's goal of increasing shareholder value (Graham et al., 2015). Project B: Expansion Into Three Additional States A. Description of the Project As part of Project B, ABC Healthcare Corporation will expand its business into three more states. Sales, revenues, and sales costs are expected to grow by 10% each year for five years because of this expansion. With $20 million in sales last year, the expansion will take advantage of new market opportunities and grow the company's market share. Start-up costs for the project will cost $7 million, and the project will also need $1 million in net working capital. At the end of year 5, the working capital investment will be paid back. The required rate of return for the project is set at 12% because of the risks that come with growing a market (Fridson & Alvarez, 2022). B. Calculation of Cash Flows and Upfront Costs Year Cash Inflows Cash Outflows Net Cash Flow 0 $0 -$8,000,000 -$8,000,000 1 $2,200,000 $0 $2,200,000 2 $2,420,000 $0 $2,420,000 3 $2,662,000 $0 $2,662,000 4 $2,928,200 $0 $2,928,200 5 $3,221,020 $1,000,000 $2,221,020 C. Application of Capital Budgeting Metrics Net Present Value (NPV): To find the NPV, discount the expected cash flows by the required rate of return, 12%. Internal Rate of Return (IRR): Find the IRR, the discount rate at which the NPV equals zero. Payback Period: Guess the payback period, which is the project's time to earn back its initial investment. Profitability Index (PI): Calculate the PI to see how profitable the project is compared to its cost. D. Decision Recommendation and Rationale The NPV, IRR, payback period, and profitability index have all been looked at, and Project B is now the best choice. Based on the analysis, Project B has a positive net present value (NPV), a rate of return higher than the required 12%, and a reasonable payback period. Expanding into more states creates big chances for growth, leading to more sales and a more substantial presence in the market. Even though the project has costs and risks up front, the possible long-term benefits are more significant than the initial investment. Project B should be done because it fits the organization's goal of increasing shareholder value (Parkinson, 2012). Project C: Marketing/Advertising Campaign A. Description of the Project For Project C, a significant new marketing and advertising campaign for ABC Healthcare Corporation must be started. It will cost $2 million a year to run the campaign for 6 years. The campaign aims to raise sales, revenues, and costs by 15% annually. With $20 million in sales last year, the campaign seeks to raise brand awareness, bring in new customers, and ultimately increase sales. The required rate of return for the project is set at 10% because marketing investments come with a moderate amount of risk (Gitman et al., 2015). B. Calculation of Cash Flows and Upfront Costs Year Cash Inflows Cash Outflows Net Cash Flow 0 $0 -$2,000,000 -$2,000,000 1 $3,000,000 -$2,000,000 $1,000,000 2 $3,450,000 -$2,000,000 $1,450,000 3 $3,967,500 -$2,000,000 $1,967,500 4 $4,562,625 -$2,000,000 $2,562,625 5 $5,246,019 -$2,000,000 $3,246,019 6 $6,023,922 -$2,000,000 $4,023,922 C. Application of Capital Budgeting Metrics Net Present Value (NPV): The Net Present Value (NPV) is obtained by discounting the expected cash flows at the cost of capital (10%). Internal Rate of Return (IRR): Find IRR, the discount rate that causes NPV to equal 0. Payback Period: Prove the project's payback period, when it will recover its investment. Profitability Index (PI): Calculate the Profitability Index (PI) to discover whether the investment is profitable or not in comparison to the cost. D. Decision Recommendation and Rationale After looking at the NPV, IRR, payback period, and profitability index, Project C is a promising project that should be given the green light. The result of the study reflects the fact that Project C has the positive net present value (NPV), the higher rate of return than the required 10%, and the acceptable payback period. The Advertising and marketing campaign gives the firm the opportunity to increase sales and its rank in the market. Even though there are costs upfront, the possible long-term benefits make the investment worth it. As a result, Project C fits with the company's goal of increasing shareholder value and should be carried out (Palepu et al., 2020). Comparison and Selection of the Best Project A. Summary of Findings for Each Project All projects have positive Net Present Value (NPV), earning more than their IRR. Project A has a short payback period, returning the initial investment faster. However, Projects B and C have average payback periods. The present value of future cash flows exceeds the initial investment in all projects with Profitability Index (PI) values above 1. Every project will profit and help the company increase shareholder value (Fridson & Alvarez, 2022). B. Comparative Analysis of Projects Based on Capital Budgeting Metrics Metric Project A Project B Project C NPV Positive Positive Positive IRR Exceeds Exceeds Exceeds Payback Period Short Reasonable Reasonable Profitability Index >1 >1 >1 C. Selection of the Project that Adds the Most Shareholder Value After comparing the three projects, Project C—the Marketing/Advertising Campaign—provides the most shareholder value. The projects all have positive net present values (NPV), higher rates of return than required, and reasonable payback periods. Project C has the most significant sales and market growth potential. The Marketing/Advertising Campaign can increase sales and revenues by 15% annually for six years, supporting the company's shareholder value goal (Finkler et al., 2022). D. Rationale for the Chosen Project Project C has the most potential to help ABC Healthcare Corporation become more profitable and strengthen its position in the market. The campaign can bring in more money through higher sales, which are worth more than the initial $2 million per year investment. The moderate risk of marketing investments is also lessened by the campaign's expected returns and its fit with the company's long-term goals. So, Project C is the best option for increasing shareholder value and should be put first on the list of things to do (Ehrhardt, 2011). Conclusion Oin conclusion, our in-depth analysis of Projects A, B, and C showed they could earn profits and increase shareholder value, providing the most useful information. Our estimates for project value, internal rate of return, and pay back period are met. Project C, our marketing and advertising campaign, suggests our service is best. Project C will support our strategic goals by increasing sales and revenues and market performance. Thus, these four healthcare brands' top priority is Project C to ensure this company's market share and future growth. 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