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Overview
Part of a manager’s role is to evaluate capital investment projects to choose the best return on investment. In this assignment, you will use capital budgeting techniques to make an investment decision and present your findings in a PowerPoint presentation.
Scenario
For this assignment, you will take on the role of a manager for Shoals Corporation. Shoals is a company that uses backhoes to complete its work. You will analyze the information provided here and then create a presentation to communicate your recommendation to company leaders.
The Shoals Corporation puts significant emphasis on cash flow when planning capital investments. The company chose its discount rate of 8 percent based on the rate of return it must pay its owners and creditors. Using that rate, Shoals Corporation then uses different methods to determine the most appropriate capital outlays.
This year, Shoals Corporation is considering the following capital investment: buying five new backhoes to replace the backhoes it now owns. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.
Use the following information in deciding whether to purchase the new backhoes:
Backhoes
Old Backhoes
New Backhoes
Purchase cost when new
$90,000
$200,000
Salvage value now
$42,000
Investment in major overhaul needed in next year
$55,000
Salvage value in 8 years
$15,000
$90,000
Remaining life
8 years
8 years
Net cash flow generated each year
$30,425
$43,900
Instructions
Complete a PowerPoint presentation in which you calculate different measures of return on investment, analyze how the results influence a proposed investment decision, and make a recommendation based on your findings. You may download the Week 5 Assignment Template Download Week 5 Assignment Template or create your own PowerPoint presentation.
(Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)
Slide 1. Use Excel to calculate the net present value of the old backhoes and the new backhoes. Save your Excel file and then insert the Excel file into the PowerPoint presentation. (Use the video linked in the Resources or follow these commands in Excel: Insert>Object>Create from File>Browse: Select your saved Excel file.)
Slide 2. Evaluate the results of the net present value calculations and how they influence the decision about purchasing new backhoes or keeping the old backhoes. Double-check that your calculations on Slide 1 are correct.
Slide 3. Use Excel to calculate the payback period for keeping the old backhoes and purchasing the new backhoes. (Hint: For the old machines, evaluate the payback of an overhaul.) Save your Excel file and then insert the Excel file into the PowerPoint presentation. (Use the video linked in the Resources or follow these commands in Excel: Insert>Object>Create from File>Browse: Select your saved Excel file.)
Slide 4. Evaluate the results of the payback period calculations and how they influence the decision about whether the company should purchase new backhoes or continue using the old backhoes. Double-check that your calculations on Slide 3 are correct.
Slide 5. Using Excel, calculate the profitability index for keeping the old backhoes and purchasing new backhoes. Save your Excel file and then insert the Excel file into the PowerPoint presentation. (Use the video linked in the Resources or follow these commands in Excel: Insert>Object>Create from File>Browse: Select your saved Excel file.)
Slide 6. Evaluate the results of your profitability index calculations and how they influence your decision about whether the company should purchase new backhoes or continue using the old backhoes. Double-check that your calculations on Slide 5 are correct.
Slide 7. Explain at least 3 intangible benefits that influence the decision to purchase new backhoes.
Slide 8. Recommend whether the company should purchase new backhoes or keep the old backhoes. Your recommendation should be consistent with your calculations and analysis in Slides 1-6 and intangibles in Slide 7.