Peter and Sons Inc - Calculations and Assumptions of the Cost of Capital - Research Proposal Example

Proposal University name Student name Student id Course Date Executive summary This proposal entails an evaluation of three projects in the manufacturing industry where the company is looking for the bets project that can assist in enhancing the financial performance. The estimations of the project revenues and the possible costs of the project are evaluated in the process of evaluating the best project that can be best for the company to ensure improved business performance. The projects have been analyzed using the analysis of their discounted cash flow while using discounted rates to assess the net present value of the project with an aim of selecting the best alternative for investment. The analysis has also involved the use of internal return of the three projects with an aim of ensuring that the best project can be selected that can ensure high returns the company. The evaluation has used DCF techniques to make sure that the company can elect the best project that can guarantee improvement in the performance. The benefits of each project have been analyzed where the various costs associated with the project has also been included in the process of assessing the benefits and the costs of the three projects. Recommendation for the selection of the project has been given based on the results of the analysis. A recommendation has been given as advice to the board of the directors aiming at making the management ensure that they have selected the best project that can guarantee high returns to the company hence improving the performance of the company. I have ensured that the non-financial factors are considered in the process of making the financial decision concerning the best project to be evaluated. Table of Contents Executive summary 1 Introduction 4 Discussion of the options 5 Option one: improving cash flow 5 Option two: reducing the costs of production 5 Option three: increasing investment 6 Calculations and assumptions of the cost of capital 7 Option one 7 Option two 7 Option 3 7 The costs and benefits of the project 8 Option 1 8 Option 2 8 Option 3 8 Evaluation of the project 8 Option 1 8 Option 2 9 Option 3 9 Evaluation of the risks 10 Option 1 10 Option 2 10 Option 3 10 Recommendations 11 References 13 Introduction Peter and Sons Inc. have been operating in the manufacturing industry where it has been facing high competition. As a result, the company has experienced a decline in the profits due to the increased competition and increased number of the firms entering the market. The company has been operating in three different regions where its sales have been declining, and the management has been looking for ways of ensuring that it can improve its performance in the industry. The projects have been suggested to make sure that the company in the different region can be improved. The first project is an inflow cash project where the company is looking for ways of ensuring that the cash flow is improved in the company. The second project entails a reduction of the costs where the company is looking for ways of ensuring that the costs of production are reduced with an aim of enhancing the profitability of the company. The three projects involve increasing the investment of the company in the different regions to improve the production and operations of the company and assess the impact of the increased investment in the performance of the company. The management wanted to evaluate the three projects with an aim of assessing their benefits while evaluating the costs associated with the projects (House, 2008). The necessary accounting techniques that include the internal rate of returns and net present value of the three project have been used to assess the best project considering their economic returns. Discussion of the options Option one: improving cash flow The company is planning to look for the ways of improving the cash flow by purchasing that are likely to ensure that the cash flow of the company has been improved. The increased investments of the assets in the production process are mainly geared towards increasing the generation of the revenue. The company was planning to invest in purchasing new equipment for improving the cash flow where the equipment was expected to reduce the costs of products by enhancing the efficiency and also generate more revenues. The new equipment that was aimed at improving the cash flow was expected to ensure that they use the most recent technology that can guarantee improved production. Based on the fact that the equipment uses the current technology the company expects that there will be improved efficiency and quality thus enhancing the performance of the company. Also, the purchased equipment is expected to reduce the manual labor requirement hence reducing the costs associated with human labor. Besides, the speed of project is expected to increase with the purchase of the new equipment hence leading to improvement of the output. Considering the increased competition in the industry that company operates, the purchase of new equipment that can keep pace with the technological changes is likely to be the best strategy that the management thinks that will assist in ensuring its products are competitive. For instance, due to the increase in output, the company is likely to experience economies of scale hence enhancing its production. Option two: reducing the costs of production The second project that the company in evaluating in the process of looking for the best way to improve its performance through reduction of the costs of production. The management of the company viewed the reduction of the costs of production as an avenue to guarantee the company success as the industry has been very competitive and adopting competitive strategies cost reduction is crucial. The company was planning to ensure implementation of cost leadership strategy to make sure that it is in a position to offer a competitive pricing strategy in the market. The company is planning to achieve the costs reduction through automating most of its production processes. The management is planning to install new machines that will ensure that the manual labor has been reduced by around $4,000 as the installation of the new machines will make the company more capital intensive in its production process. Therefore, through the reduction of the costs of production the company will be in a position to realize increased returns thus improving its performance. Option three: increasing investment The company is planning to increase the investments in the process of improving its performance. The increased investment is aimed at making the company competitive in the market. Through investment, its ability to implement most of the strategies that can make the company survive the increased competition will be improved. The company is planning to invest around $255,000 to make the company able to implement most of its formulated strategies efficiently. Besides, the increased investment is expected to improve the ability of the company to keep pace with the changes taking place in the market. For instance, the company is projecting that through the increased investment it will be in a position to invest in research with an aim of ensuring that it is aware of the changes taking place in the market. Besides, it will be in a position to invest in innovation where the companies products will be innovatively designed to enhance make them competitive in the market. Calculations and assumptions of the cost of capital Option one The costs of the equipment are expected to be around $6,000 where the cash flow annually is expected to increase by approximately $2,200. The equipment is assumed to have a useful life of around six years. The equipment is assumed to have no any salvage value after the period of 6 years. The management of the company expects to realize returns of around 20% on the investments. Option two The cost of purchasing and installing the new machines that will ensure efficiency of the company are expected to costs around $15,000. The new machine installations are expected to reduce the costs of reduction by around $4,200 in the process of enhancing the efficiency of the manufacturing process. The company assumes the machine to have a life of around 15 years where the salvage value of the new machine after the period of the 15 years is assumed to be zero. Besides, the rate of return is expected to be 25%. Option 3 The company is planning to invest around $225,000 in ensuring that the necessary resource required to implementing the various formulated strategies. The rate of return is assumed to be around 12% where the cash flow for the next four years includes the following: $95,000, $80,000, $60,000, and $55,000 respectively for the four years. The costs and benefits of the project Option 1 The company expects purchasing of the equipment to ensure cost reduction in the future. The costs control process is likely to be made efficient by the use of the new equipment that will make sure that the cost is reduced. As a result, the company will benefit from ensuring that costs of production are minimized to enhance the profitability of the company. Option 2 The installation of the new machines will guarantee a decrease in the costs of production be enhancing the efficiency of the manufacturing process. The cost savings is expected to be high that the installation costs incurred in the process of installing and purchasing of the machine. Option 3 The increased investments are expected to enhance the operations of the company by ensuring that the company is in a position to adopt competitive strategies. As a result, the company is expected to be competitive by making sure that the strategies adopted are in a position to guarantee improved performance (David, 2007). Evaluation of the project Option 1 Net present value: Option 2 Option 3 year Present value 12% Net cash flow Present value one 0.89 $95,000 $ 84,835  Two  0.79 $80,000 $63,760  three  0.71 $60,000 $42,720  Four  0.63 $55,000 $34,980 Five ——–   $ 226,295 Initial investment $225,000  ——– NPV $ 1,295  ——– Evaluation of the risks Option 1 The risks of the purchase of the equipment are the extra costs that are likely to be associated with the need for training. The employee will need to be trained on the use of the equipment of the project (Stufflebeam & Webster, 2010). Therefore, the company might incur extra costs that are needed for training the employees in the ways of operating the equipment. Option 2 The risks associated with the installation of the new machines that are aimed at improving the efficiency of the company are associated with the need for adoption of the new technology. The company will be forced invest in technology so that it can ensure it is efficient in its operations (Sarah, 2002). As a result, the company has to invest in the new technology that might expensive hence affecting the funds allocated for the operations, as the new technology purchase will require more resources. Option 3 Investments done in the company might lead to the change in the operations of the company. This is because the investments will be geared towards ensuring that the bet strategies are adopted in the process of ensuring that the company is competitive in the market. For instance, some strategies will require the company to increase its innovation in the operations that might result in increased changes in the operations of the company. The other risks that might be associated with this option include resistance from the employees, as they might fear to implement the change strategies. This is because most of these changes are likely to result in loss of jobs for some employees due to the capital intensive mechanism of production adopted in the process of the company being innovative (Ross, 2004). Therefore, this option is associated with changes that are likely to result in resistance from the employees. Recommendations Considering the net present value and the internal rate of return the best option one. The net present value is $1,317, which is positive and internal rate of return 20%, meaning that the company will be in a position to realize an increase in returns by 2005 after purchasing the equipment. The improvement can be associated with the fact that buying equipment that is technology based is likely to improve the performance of the company (Staff, 2012). The equipment will ensure that the company is efficient in its operations where its operations will realize a reduction in costs and improved quality. Through the use of the equipment, the company will be very innovative making it easy for the company to ensure competitive products. Besides, the company will be in a position to make sure that the best and competitive strategies are adopted in the company. References David Todd, 2007. GEF Evaluation Office Ethical Guidelines (PDF). Washington, DC, United States: Global Environment Facility Evaluation Office. House, E. R. 2008. Assumptions underlying evaluation models. Educational Researcher. 7(3), 4-12. Ross, P.H.; Ellipse, M.W.; Freeman, H.E. 2004. Evaluation: A systematic approach (7th ed.). Thousand Oaks: Sage Sarah del Tufo 13 March 2002. "WHAT is evaluation?". Evaluation Trust. The Evaluation Trust. Staff 2012. "UNEG Home". United Nations Evaluation Group. United Nations Evaluation Group. Retrieved 13 May 2012. Stufflebeam, D. L., & Webster, W. J. 2010. "An analysis of alternative approaches to evaluation". Educational Evaluation and Policy Analysis.   Read More