Capital Budgeting Tools

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.
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.
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%.
Your Role
You are a finance manager at Drill Tech, Inc., who plays a major role in reviewing capital project
requests.
Requirements
Jennifer reiterates that your report is critical for the company to select the project that will bring
the most value to shareholders. Your calculations and report should address these items for her
and other stakeholders:
● Apply computations of capital budgeting methods to determine the quality of the
proposed investments.
○ Use budgeting tools to compute future project cash flows and compare them to
upfront costs. Remember to only evaluate the incremental changes to cash flows.
○ 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 the capital projects using data analysis and applicable metrics that align to the
business goal of maximizing shareholder value.
○ 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.
● Prepare an appropriate evaluation report for requestors, using sound research and data
to defend your decision.
○ Justify your decision with a clear analysis showing the findings of the analysis
and which project has the best chance to increase shareholder value.
○ Use your calculations and data to provide a clear picture of why your
recommendation is the right one. This goes beyond just regurgitating the data.
Think about how the data can tell the story that will be meaningful to the readers.
Deliverable Format
For this assessment, create two deliverables:
1. An Excel spreadsheet showing the required cash flow forecasts and capital budgeting
tool calculations for each project. Use the same spreadsheet but create separate tabs for
each project.
2. A report providing an analysis of the computations, the project selection decision, and
justification for the decision, as well as its impact on the value of the firm. The project
selection decision must have an analytical rationale to support it.
Report requirements:
● Ensure written communication is free of errors that detract from the overall message and
quality.
● Use at least three scholarly resources.
● Your report should be between 6 and 8 pages.
● Use 12 point, Times New Roman.