You are an employee in the Financial Department of a medium-sized company of your choice. The company must determine the feasibility of the company making an investment in a new product line overseas or keeping it in the US. Propose the methods or techniques used to make proper capital budgeting decisions.
Describe the product.
Identify 3 qualitative and 3 quantitative factors to consider and justify why you included each in analyzing the scenario presented.
Evaluate the similarities and differences between investing in the US and in a foreign country and include a discussion on free trade.
Determine the various financial
The decision is whether to build the new, automated manufacturing facility in the US (e.g., Ohio) or overseas (e.g., Vietnam) to serve global distribution.
Capital Budgeting Methods
To determine the financial feasibility of this major investment, we must use rigorous capital budgeting techniques that account for the project's entire life cycle. The primary methods we will use are:
Net Present Value (NPV): This is the most crucial method. It calculates the present value of all expected future cash flows (inflows minus outflows) from the project, discounted by the company’s required rate of return (cost of capital), and then subtracts the initial investment.
Decision Rule: If NPV>0, accept the project. If NPV<0, reject it. NPV is superior because it explicitly accounts for the time value of money and provides a direct measure of the project's expected contribution to shareholder wealth.
Internal Rate of Return (IRR): The IRR is the discount rate that makes the NPV of the project equal to zero.
Decision Rule: If IRR>Cost of Capital, accept the project. It provides a simple, easily understood percentage return that management can compare to other investments.
Payback Period: This calculates the amount of time it takes for the project's cumulative cash inflows to equal the initial investment.
Use: While less sophisticated (as it ignores cash flows after the payback period and the time value of money), it is a valuable risk-screening tool for management concerned with liquidity and the time it takes to recover capital.
Sample Answer
As an employee in the Financial Department, I'll propose the capital budgeting methods needed for this crucial investment decision.
Proposed Investment and Capital Budgeting Methods
Product Description
The company I work for is "Apex Industrial Solutions," a medium-sized firm specializing in heavy-duty commercial equipment.
New Product Line: We are considering investing in a new line of High-Efficiency Electric Forklifts 🔋. This product line targets the growing global market for sustainable logistics and warehousing.