Project 4: Finance for Managers

Report to Management

[Team Name Here]

[Date Here]

[Faculty Name Here]

Report to Management
 Analyze Financing and Investing Activities

Capital budgeting is a crucial decision investment decision that must be taken with a

higher level of consideration by business. Therefore, McCormick & Company should be ready to

use the investment techniques that are available to ensure that a proper evaluation is done before

the project is considered viable for investment. The company can use methods such as the net

present value, internal rate of return and payback period to determine the level of profitability

project (Karadag, 2015: Vernimmen et. al., 2014). For the evaluation purposes, the company

should pick a favorable rate of return that gives the accurate picture of the investment. For the

case scenario, the purchase price of the new factory in Largo, Maryland is $ 4,000,000.

McCormick & Company predicts a net cash inflow of $ 780,000 for a specified period of 10

years. Again, the project will be discounted at 14%, and the viability of the projected can be

evaluated by calculating the present values of the cash flows that are expected from the project.

Table 1 present the computation of the new factory NPV, the expected cash flow has a positive

net present value thus showing that the investment in the new factory is profitable and

recommendable for the company.

Table 1: Computation of the factory NPV

Year Cash flow D.F @ 14% Present value
1 780,000 0.8772 684,211
2 780,000 0.7695 600,185
3 780,000 0.6750 526,478
4 780,000 0.5921 461,823
5 780,000 0.5194 405,108
6 780,000 0.4556 355,358
7 780,000 0.3996 311,717
8 780,000 0.3506 273,436
9 780,000 0.3075 239,856
10 780,000 0.2697 210,400
  Present value   4,068,570
  Purchase Price   4,000,000
  NPV   68,570
 For a well-informed decision, case two uses the relevant annual expected cash flow of the

new factory at a predetermined discounting rate of 20%. Relevant cash flow is the incremental

revenue streams that expected from the use of the new factory. Table 2 represents the

computation of the NPV from the relevant cash flows. The expected relevant cash flow from the

new factory show an increasing rate of return right from year one hence showing that the project

is profitable and viable in the long-run (Weygandt, Kimmel & Kieso, 2015). By considering the

two scenarios, the new factory should be considered for investment.

Table 2: New factory NPV using relevant cash flows

Year Cash flow D.F @ 13% Present value
1 327,500 0.884955752 289,823
2 291,000 0.783146683 227,896
3 191,000 0.693050162 132,373
4 306,000 0.693050162 212,073
5 424,000 0.693050162 293,853
  Present value   1,156,018
 References

Karadag, H. (2015). Financial management challenges in small and medium-sized enterprises: A

strategic management approach. EMAJ: Emerging Markets Journal, 5(1), 26-40.

Vernimmen, P., Quiry, P., Dallocchio, M., Le Fur, Y., & Salvi, A. (2014). Corporate finance:

theory and practice. John Wiley & Sons.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Financial & managerial accounting.

John Wiley & Sons.