Case Scenario:
You are a financial analyst in the finance division of Strident Marks (On Your Mark), a manufacturer of athletic equipment and apparel, which has recently gone through the initial public offering (IPO) process and has become a public company. Strident Marks (On Your Mark) has annual sales revenue of approximately $50 million and makes seven unique and distinct products (which serve seven different markets). Each product is represented by its own division within the company and has its own group of sales, marketing, and manufacturing personnel. Some departments, including human resources and the finance division, support the entire organization. Operations consist of a single headquarters and production (manufacturing) center.
In your role as financial analyst you are responsible for compiling and reporting on budget / forecast data, for assisting your investor relations department, and for assessing and valuing new business opportunities (which will ultimately be presented to upper management). You report directly to the Chief Financial Officer (CFO) and have the use of the accounting department's staff accountants to assist you with your budget / forecast responsibilities.
You have been informed by the CFO that Strident Marks (On Your Mark) will be aggressively pursuing new business opportunities, which may include expansion through acquisition and the development and implementation of new products. As a publicly traded company, Strident Marks (On Your Mark) is scrutinized by bankers and investors as never before. In fulfilling your responsibilities you must keep this in mind, and you must instill a new sense of financial discipline in the organization.
Strident Marks (On Your Mark) is considering purchasing new manufacturing equipment that costs $1,300,000 and is expected to improve cash flows by $500,000 in year 1, $350,000 in year 2, $475,000 in year 3, $450,000 in year 4, and $300,000 in year 5.
Calculate key financial metrics for this capital budgeting project. A 14% rate of return and a payback period of less than five years are required for the project. These key metrics must include (1) payback period, (2) net present value, and (3) internal rate of return. (Use 6% as the weighted average cost of capital).
In a memo to the CFO, discuss the metrics and make a recommendation whether to accept or reject the project.