Capital Investment
Application: A Letter to the Board of Directors
Decisions involving capital expenditures often require managers to weight 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 expenditures to make the best decisions for their organization.
For this Assignment, review the information in the scenario presented. You will utilize the information in this week's resources and media to make a recommendation in regard to a capital expenditure.
Garrison Appliances, Inc.
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 organization 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, India follow:
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Possible Location
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Mumbai
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Bangalore
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Initial cash outlay
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$5,000,000
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$2,800,000
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Useful life
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20 years
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20 years
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Net cash inflows excluding depreciation
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$1,100,000
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$860,000
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The cost of capital
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9%
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9%
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Tax rate
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40%
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40%
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The Assignment:
• Part 1: Prepare a spreadsheet using Excel or a similar program in which you compute the following for each proposed location:
o Accounting rate of return on investment
o Payback
o Net present value
o Internal rate of return
Note: Be sure to view the media for this week before starting this Assignment.
• Part 2: Utilizing Word or another word processing software program, prepare a written report for the Board of Directors. The intended audience is clear from the salutation and the language used throughout the report.
o Include a detailed and thorough explanation of the conclusion you reached regarding the feasibility of each proposal supported by the calculations prepared in Part 1.
o Explain at leastfive non-financial items (e.g., culture, language, etc.), which may impact the perceived desirability of each location.
o Select the one location you recommend the Board invest in. Explain your rationale in precise and detailed language.