The board members of Felicia & Fred are strategically evaluating the prospects of fulfilling increasing demand for its products and reaching new consumers. You have recently evaluated the expansion of manufacturing facilities for Felicia & Fred, entailing two alternative projects: customizing and refurbishing a large former mill building; versus building a new facility on the west coast on property already owned by the firm. Below is a table summarizing your findings: Project Strategy NPV IRR Discounted Payback Refurbish $450,000 14% 4.5 years Build New $350,000 16% 4 years The company’s WACC is currently 10%.
1. Which of the project strategy alternatives from the table above should be chosen by the company? Which decision rule should be the basis of decision making when the outcomes conflict?
2. With the refurbish option due to the nature of the project the firm would be required to outlay capital investments in year 0 and also in year 3. How does the delayed investment impact the project? Consider the table above; which project strategy needs to be reconsidered, why? What can be done to overcome the problem?
3. Felicia and Fred learn that the previous analysts in their jobs position with the firm preferred to rely on discounted payback as an approach to value projects. What is this and should this affect how they proceed with their analysis?
4. Felicia and Fred aside for a moment. If any students have an example from their professional experience that is directly applicable to the concepts of project valuation and investment decision rules please feel free to share with us some of the insights you have observed and learned relative to this topic.