Investment Opportunities of FirstRate Company - Speech or Presentation Example

FirstRate Company M E M O R A N D U M Submitted] Paul Samuelson, President and CEO 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) Word count= 1398 All investment alternatives apart from investment 5 have a positive net present value. This means that they are viable options for investment. However investment alternative has more attractive benefits in form of large amount of return for the five years at a minimal risk involved with an expectation of huge savings to be made for fifteen years. (Continued) 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. (Continued) 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 The net present value of this investment is $285,987.978-250,000 thus $35,987.978 representing the total value of $1,000,000. The present value for the first year is $150,000, the second year the present value is $90909.09 and the final year has a present value of $45078.888. The initial cost of the investment was a cost the machine which is $250,000. The net present value for this investment is a positive value therefore the investment can be made if it offers the best return for the company or there are no other mutually exclusive alternatives to this investment. The margin is big enough meaning that the risk involved is minimal and there is a chance of reaping profits after the three years. 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 initial cost of investment is $500,000 and yearly savings of $75,000. The net present value is calculated with the savings value as ∑t=1t=15 75,000/1t=15 this gives $75,000 for each year for 15 years. The net present value is therefore $1125000-500,000= $625,000. The net present value for this investment alternative is a large positive figure denoting that it is good investment. The purchase of the business and the vertical integration is encouraging to the investor. This is because the savings in addition to the profits earned will ensure survival for the next fifteen years thus minimal risks are involved in this investment. Investment alternative 3: Replace certain manufacturing equipment with new equipment that would produce cleaner emissions from operations The present value for this investment is in form of the benefits reaped from installing the low emission machines. The investment costs $100,000 for compliance with the EPA emission standards that currently do not require their installation. So this investment has a net present value equals to the amount saved if the machine was bought in the future rather than now which is expected to rise. The investment in the future will be beneficial since the current price of the new machines will rise once the standards require their installation. This investment is valuable in that the company will not have to buy the machines for higher prices once the EPA standards demand the installation and the demand for the machine rises and so their prices Investment alternative 4: Purchase undeveloped land zoned for commercial use The net present value for this investment alternative is 341,000-200,000=141,000 dollars. the investment also has other considerations such that the land is in undeveloped land and it is expected that economic activities in the land will increase so its demand and thus its value appreciates. The land appreciates in five years time with a value of $141,000 which means that the company will receive a higher amount if the land is sold. The land is not expected to be used for company operations so the only option remains is to sell it. This is not a very attractive alternative for such an amount of money for five years. Investment alternative 5: Purchase a bank certificate of deposit (CD) The investment amount is $300,000 and interest rate is 5.5% paid annually. The net present value is 300,000*0.055*3= 49,500 dollars. the security of the investment is maximum meaning there is no risk involved. The investment has a positive net present value and minimal risk is involved since there is a guarantee of returns and no loss to be expected. This is a good investment for such an amount of cash and for the three years. Investment alternative 6: Repay an existing bank loan outstanding The loan amount is $200,000 with an interest rate of 11.5% so after five years the interest paid will be 200,000*0.115*5= 115,000. There are no financial benefits from repaying the loan now and this amount of cash can be used for investing in another project that can repay the loan and the interest. 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 Read More