MBA 604 Topic 5 Assignment - FirstRate Company

FirstRate Company

M E M O R A N D U M

Date:

[Date Submitted]

To:

Paul Samuelson, President and CEO

From:

[Your name]

Subject:

Investment Recommendations

Purpose

The purpose of this memorandum is to evaluate each of the investment opportunities set forth below using present value concepts and present my recommendations based on my financial calculations and other factors that warrant your consideration.

I understand that, based on my recommendations, the company will allocate up to $1,000,000 of available capital to the superior investment opportunities. The required rate of return (discount rate) for new investments by the company is 10.0 percent. For the purposes of this analysis, I have ignored income taxes, as instructed.

Summary and Conclusion(Limit the length of your summary and conclusions to a maximum of 150 words)

Please provide your word count here

Your summary and conclusions (please do not modify the formatting, fonts, colors, and so forth in this document template)

Description of Investment Alternatives Analyzed

Investment alternative 1:

Purchase an additional fabrication machine that will allow the company to expand output of its principal product

The cost of the machine is $250,000. I expect the machine to generate the following additional future end-of-year operating cash inflows:

Year 1: $150,000

Year 2: $100,000

Year 3: $60,000

I do not expect the machine to have a residual value at the end of its three-year useful life.

Investment alternative 2:

Purchase a business that is a major supplier of key raw materials used by the company in manufacturing its principal product

The owner of the supplier firm has indicated that he would be willing to sell his business for $500,000. I expect this “vertical integration” of the company to result in reduced material costs totaling $75,000 annually for the next 15 years. I do not expect these savings to continue after 15 years.

Investment alternative 3:

Replace certain manufacturing equipment with new equipment that would produce cleaner emissions from operations

The cost of the low-emission (replacement) equipment is $50,000 for each of the company’s two existing production lines, totaling $100,000 if the company installed the equipment in both production lines. While the company must comply with certain EPA regulations limiting release of certain pollutants into the atmosphere, based on relevant emission measurements made by the company, those regulations do not presently require the company to install the new equipment. There do not appear to be additional revenue or cost savings that the new equipment will generate.

Investment alternative 4:

Purchase undeveloped land zoned for commercial use

A land broker has indicated that she expects future economic development in the community where the land is located to lead to substantial appreciation in the land’s value over the next decade. The cost of the land is $200,000. While management does not expect to develop the land for use in the company’s operations, I estimate the value of the land will appreciate by approximately 11.25 percent annually during the next five years to $341,000.

Investment alternative 5:

Purchase a bank certificate of deposit (CD)

The largest bank serving the company’s local business community is currently offering an interest rate of 5.5 percent on three-year CDs. The bank pays interest on its CDs to depositors annually. The company’s investment policy limits deposits in any individual bank to a maximum of $300,000.

Investment alternative 6:

Repay an existing bank loan outstanding

The company has a $200,000 loan outstanding from a local community bank. The interest rate on the loan is 11.5 percent (fixed). Interest payments on the loan are due at the end of each year and the loan balance matures in full in five years.

Present Value Calculations and Other Factors Warranting Consideration(Limit the length of your analysis of each investment alternative to a maximum of 100 words, excluding present value calculations)

Investment alternative 1:

Purchase an additional fabrication machine that will allow the company to expand output of its principal product

Please describe your present value calculations, here (for example, “The net present value [NPV] of this investment is $1,000, representing the total present value, $1,900, of $500 cash to be received at the end of each of the next 5 years, less the cost of the initial investment of $900.”)

Please provide your narrative analysis of this investment alternative, here, including any additional financial or nonfinancial factors warranting consideration

Investment alternative 2:

Purchase a business that is a major supplier of key raw materials used by the company in manufacturing its principal product

Present value calculations

Narrative analysis of this investment alternative

Investment alternative 3:

Replace certain manufacturing equipment with new equipment that would produce cleaner emissions from operations

Present value calculations

Narrative analysis of this investment alternative

Investment alternative 4:

Purchase undeveloped land zoned for commercial use

Present value calculations

Narrative analysis of this investment alternative

Investment alternative 5:

Purchase a bank certificate of deposit (CD)

Present value calculations

Narrative analysis of this investment alternative

Investment alternative 6:

Repay an existing bank loan outstanding

Present value calculations

Narrative analysis of this investment alternative

The facilitator will grade this assignment, assigning up to 100 points for it as follows:

Maximum

Earned

Complete, accurate, and clear calculations using present value concepts

50 points

Clear, concise, and persuasive summary recommendations, explanation of your present value calculations, and narrative analysis of any other factors affecting your recommendations

50

Total points

100 points