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You are the senior financial analyst at a mid-sized manufacturing firm in the Chicago area. Your supervisor, the VP of Finance, has asked your help in choosing between two capital projects. Each project represents a new manufacturing method to be used for a new line of products to be introduced in the firm's current markets. Below are the expected cash flows for the two projects:
Year
Project 1
Project 2
0
(5,250,000)
(6,500,000)
1
850,000
1,250,000
2
900,000
1,400,000
3
1,000,000
1,500,000
4
5
6
7
800,000
1,100,000
8
700,000
9
600,000
10
500,000
These figures have been checked and approved by your supervisor. Your assignment is to decide which of the two mutually exclusive projects should be chosen, or if neither one is a good investment. To complicate matters, your supervisor believes that the firms WACC is either 9% or 11%, but he is not sure, and the CFO (the only one who knows for sure what the WACC is) is on a cruise ship in Greece for the next two weeks. The analysis needs to be done immediately.
In order to make the decision between these two capital investments, you must provide the following analysis items:
Based on those analysis items, you must make a recommendation to your supervisor on whether either of the two mutually exclusive investments is worthwhile. You must provide an Excel workbook showing all of the analysis indicated above, and write a one page paper giving your recommendation based on the analysis. The paper is to be in the form of a business memo to your boss (me) outlining the results of your analysis and your recommendation.
Government regulators use the term
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