Question - Evaluating Costs and Benefits
Decisions involving capital expenditures often require managers to weigh the costs and benefits of different options related to the same goal or project. For instance, deciding whether to replace, repair, or do nothing to existing equipment is a capital expenditure decision that involves calculations, projections, and deliberations. Similarly in HR management, deciding whether to train from within or outsource involves alternate expenses. Managers must be able to quantitatively analyze different options for capital expenditure to identify the best business decisions having the greatest estimated long term ROI. For this Application, you will have the opportunity to utilize the information in this week's Resources to make a recommendation in regard to a capital expenditure.
You will set up and use an Excel spreadsheet for all your calculations for the problems below, and the spreadsheet you develop should be what you turn in for the Application. Note: The Resources section includes tutorials for those who might need help in designing and using an Excel spreadsheet.
Garrison Appliances Inc. Read the information below and complete Parts I, II and III
Garrison Appliances, Inc., is considering expanding its international presence. It sells 25% of all the toaster ovens sold in the United States, but only 3% of the toaster ovens sold outside of the United States. The company believes that it can sell more of its product if it has a production facility located overseas. Estimates concerning two possible locations, Mumbai and Bangalore, follow:
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Possible Location
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Mumbai
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Bangalore
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Initial cash outlay
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$5,000,000
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$2,800,000
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Useful life
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20 years
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20 years
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Net cash inflows excluding depreciation
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$1,100,000
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$860,000
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The cost of capital
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9%
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9%
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Tax rate
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40%
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40%
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Evaluate each of the proposed locations using each of the following: 1) average rate of return on investment, 2) payback period, 3) net present value, 4) profitability index, and 5) internal rate of return.
Part I: Prepare a written report for the board of directors detailing exactly how you computed each item for each proposal and then explain in detail the conclusion you reached regarding the feasibility of each proposal. If the board decides to invest in only one location, explain which one it should be and why.
Part II: What other factors should be considered before making a decision and why?
Part III: What HRM considerations might be included in this specific capital budgeting analysis? Be specific, how could cash inflows and outflows be analyzed.