You will set up and use an Excel spreadsheet for all your calculations for the problems below, and the spreadsheet you develop should be what you turn in for the Application.
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.
Part II: What other factors should be considered before making a decision and why?