Project Two - Finance

FIN 320 Project Two Financial Assumptions

Whenever a business needs to make an investment, the financial options associated with that investment must be carefully considered. This is true whether the business seeks to purchase something as simple as a new building or a piece of equipment, or something as complex as acquiring a new business. Business leaders need to be able to estimate cash flows from an investment and use the net present value (NPV) method to figure out if the investment is worthwhile.

This document includes lists for three financial options and their associated assumptions. For your Project Two assignment, analyze all three financial options provided, then select the option or options that add the most value to the business you have selected based on all the information you’ve gathered. Your recommendation should include careful analysis of NPV calculations, financial ratios, working capital analysis, and supportive documents.

Remember to evaluate each financial option in the context of the financial ratio analysis and working capital analysis to help you decide which option(s) to recommend to your chosen business in your Project Two assignment.

Financial Option 1: Purchase a $10 Million Building Rationale for investment: The business is considering environmental, social, and corporate governance (ESG) factors as part of its investment into a new building for its headquarters. The building itself will be a Leadership in Energy and Environmental Design (LEED)-certified building, but the new site being considered currently houses a large, inactive gas station that sold both gasoline and diesel fuel. The new site also has a sizable repair facility left over that was used for deliveries and tractor-trailer trucks for more than 50 years. While some restoration was performed on the site prior to the new building’s construction, the previous owner ran out of funds before they were ever able to bring the site up to LEED standards. Four large fuel tanks remain on the site, and they will also need to be addressed per LEED standards.

Assumptions to consider:

 $10 million cash purchase  Building generates additional net profits after tax of $1.25 million per year  20 year expected useful life of building  Salvage value: $1.5 million  Discount rate is 10%

Financial Option 2: Lease of $ 25 Million in Equipment Rationale for investment: The business’s current equipment is efficient, but it uses a substantial amount of electricity. Operating the production line also creates significant waste material, including waste plastics. The business is looking into leasing newer, more environmentally friendly equipment that will still allow it to be at least as efficient in production as it is now.

Assumptions to consider:

 Annual cash flows generated with equipment: $4 million  Discount rate is 12%

 15-year useful life  No salvage value

Financial Option 3: $30 Million Investment in Bonds

Rationale for investment: The business that’s offering these bonds for sale contracts with another business in China to assemble computer components. The Chinese business is known to have used child labor in the past, but claims it has stopped this practice. However, the U.S. business selling these bonds has not investigated to verify whether these claims are true or not.

Assumptions to consider:

 10-year bond  8% coupon  Priced at a discount: $95  Discount rate is 9%