Decisions involving capital expenditures:
Decisions involving capital expenditures often require managers to weigh 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 expenditure to identify the best business decisions. For this Application, you will have the opportunity to utilize the information in this week’s Resources to make a recommendation in regard to a capital expenditure.
You will set up and use an Excel spreadsheet for all your calculations for the problems below (EXCEL SHEET IS ANOTHER ATTACHMENT), and the spreadsheet you develop should be what you turn in for the assignment
Garrison Appliances Inc.
Read the information below and complete Parts I and II
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 company 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, follow:
Possible Location Mumbai Bangalore
Initial cash outlay $5,000,000 $2,800,000
Useful life 20 years 20 years
Net cash inflows excluding depreciation $1,100,000 $860,000
The cost of capital 9% 9%
Tax rate 40% 40%
Evaluate each of the proposed locations using each of the following: 1) average rate of return on investment, 2) payback period, 3) net present value, 4) profitability index, and 5) internal rate of return.
Part I: Prepare a written report for the board of directors detailing exactly how you computed each item for each proposal and then explain in detail the conclusion you reached regarding the feasibility of each proposal. If the board decides to invest in only one location, explain which one it should be and why.(about 6 detailed paragraphs)
Part II: What other factors should be considered before making a decision and why? (detailed)