Assess Investment OptionsMT480M4: Assess investment options based upon cost of capital and expected...

Question

Assess Investment OptionsMT480M4: Assess investment options based upon cost of capital and expected returns.AssessmentRead the scenario and address all the checklist items.Scenario: A new product manager presents to you, the Chief Financial Officer, a proposal to expand operations that includes the purchase of a new machine. The product manager is certain that the positive cash flows, which exceed the initial outlay by $20,000 by the end of year 4, will ing both praise and approval. You explain the company uses a 12% discount rate for cash flows and project related budgeting. You take the time to present the details of the Net Present Value (NPV) model used to assess product proposals. The data is below.Project Outflows to Buy Machine             Day 1 Cash Out                           -$70,000 12% discount rate applied.End Year 1 Cash Repayment        $10,000End Year 2 Cash Repayment        $20,000End Year 3 Cash Repayment        $30,000End Year 4 Cash Repayment        $30,000To educate the new manager, and as CFO, you take the time to evaluate the following:Checklist:· Evaluate how the Time Value of Money concept results in a discounted cash flow in year 4 (an amount less than $30,000).· Assess the investment option using a 12% cost of capital discount rate by applying the NPV model. Include values in your assessment. Provide the NPV at a 12% cost of capital discount rate. Include values in your assessment.· Assess the investment option when a 7% cost of capital discount rate, versus a 12% cost of capital discount rate is applied.  Include values in your assessment. Provides the NPV at a 7% cost of capital discount rate.Submit a 2– 3 page paper with an additional title page in APA format. Submission Requirements· Address all the checklist items.· The main points of the response should be developed and explained clearly with appropriate financial and accounting terminology.· Support all arguments (no eors in logic) in responding to checklist items. · APA formatting dictates that you use Times New Roman 12-point font, with coect citations, uses Standard English with no spelling or punctuation eors. Grading Ruic Checklist

Neenisha · Accepted Answer

Investment Options Assessments
As a Chief Financial Officer, the new product manager proposes a project which can be used to expand the operations. We are given the cash outlay to start this new project and machine need to be purchased and for the next 4 years we are given the cash flows which this project would generate.
The discount rate given for the project is 12% which will be used to analyse and assess the present value of cash flows and the profitability of the project i.e. whether the project should be undertaken or not.
Table 1
	Time Period ( T )
	0
	1
	2
	3
	4
	Cash Flows
	 $      (70000)
	 $      10000 
	 $      20000 
	 $      30000 
	 $      30000 
Part ( a )
In this scenario we need to analyse the cash flows generated by the project. The production manager claims that this project would generate an additional cash of $ 20,000 by the end of year 4 as compared to the initial cash outflow.
However, making this claim the present value of the cash flows was not considered.
We know that
Present Value  = 
Table 2 
	Time Period ( T )
	0
	1
	2
	3
	4
	Discounted Cash Flows
	 $      (70000)
	 $        8929 
	 $      15944 
	 $      21353 
	 $      19066 
We computed the present value of the cash flows for every year which is shown in Table 2.

Assess Investment Options MT480M4: Assess investment options based upon cost of capital and expected returns. Assessment Read the scenario and address all the checklist items. Scenario: A new product...

Solution

Answer To This Question Is Available To Download

Related Questions & Answers

Submit New Assignment