MBA FPX 5014 Assessment 2 Evaluation of Capital Projects

Student Name

Capella University

MBA-FPX5014 Applied Managerial Finance

Prof. Name

Date

Executive Summary

Evaluation of Capital Projects

Drill Tech, Inc., a mid-sized manufacturing company based in Minnesota (Saunders, 2000), is contemplating three potential capital projects in the upcoming fiscal year. The projects under consideration include a major equipment purchase, an expansion into Western Europe, and a marketing/advertising campaign. This evaluation aims to determine the most suitable project for pursuit based on capital budgeting tools.

Background

A capital project involves long-term investments aimed at enhancing, building, maintaining, or developing a capital asset for the company (Marshall, McManus, & Viele, 2017). Significant investments are required throughout the project’s duration, making it crucial to identify the project that maximizes shareholder value for Drill Tech, Inc. Shareholder value is intrinsic to a shareholder’s possession of a company’s share and contributes to the overall capitalization (Saunders, 2000).

MBA FPX 5014 Assessments 2 Evaluation of Capital Projects

Capital Projects Overview

Project A: Major Equipment Purchase

The major equipment purchase entails an initial investment of $10 million, with a projected reduction in the cost of sales by 5% annually over 8 years. The project’s NPV is calculated at 28.77, with a required rate of return of 8%.

Project B: Expansion into Europe

The expansion into Western Europe forecasts a 10% annual increase in sales and cost of sales over a 5-year period. The project requires an investment of $7 million and an upfront net working capital of $1 million. With a higher risk profile, the project’s NPV is 17.1, and the required rate of return is 12%.

Project C: Marketing/Advertising Campaign

The marketing/advertising campaign incurs no initial startup costs but involves an annual expenditure of $2 million over 6 years, totaling $12 million. Sales are projected to increase by 15% annually, along with a corresponding 15% increase in cost of sales. The project’s NPV is 32.4, with a required rate of return of 10%.

Capital Budgeting Methods

Payback Period

The payback period for Project A is 2 years, while Project B recoups its initial investment in year 3. Project C, with no initial investment, has no payback period.

IRR: Internal Rate of Return

The IRR for Project A is 0.70, and for Project B, it is 0.81. Project C’s IRR is not applicable due to the absence of an initial investment.

PI: Profitability Index

The PI for Project A is 1.15, and for Project B, it is 1.22. Project C’s PI is not applicable.

NPV: Net Present Value

The NPV for Project A is 28.77, for Project B, it is 17.1, and for Project C, it is 32.4.

Conclusion

Considering the various capital budgeting methods, the marketing/advertising campaign (Project C) emerges as the most favorable option, with the highest NPV of 32.4. This project is recommended for pursuit as it is projected to maximize shareholder value for Drill Tech, Inc.

References

Saunders, A. (2000). Financial Institutions Management: A Modern Perspective. McGraw-Hill College.

Marshall, D., McManus, W., & Viele, D. (2017). Accounting: What the Numbers Mean (11th ed.). New York, NY: McGraw-Hill Education.

MBA FPX 5014 Assessment 2 Evaluation of Capital Projects

MBA FPX 5014 Assessments 2 Evaluation of Capital Projects