Analyzing the Business case

This assignment builds on the financial model you developed for your Task 3 assignment. You need to have successfully completed the Task 3 assignment before attempting this task.

Use your completed task 3 assignment as the template for this task. You should now have a model of the project cash flows for your current operating baseline and the vendor proposal, as well as the cash savings represented by the vendor proposal. Your next step is to analyze the NPV, discounted ROI, and payback period of the project, as well as determine the internal rate of return (IRR).

Part 1: Your company’s cost of capital for new projects is 15%. This is the discount rate for this project. Applying this figure:

  • What is the initial investment of the project?
  • What is the NPV of the project if we pursue the vendor proposal?
  • What is the discounted ROI of the project?
  • What is the payback period (number of months)?
  • What is the IRR of the project?

Based on these findings, should the company considering pursuing this project, or should it be rejected?

Part 2:: Now assume that the company is considering a second project that lasts 5 years, requires a $3M capital investment, and generates NPV of $400,000. Your company can fund only project, not both. Which project do you recommend, and why?

Part 3:: NNow assume that the CFO has informed you that it is not clear that the company will be able to claim the tax benefit of the depreciation expense if the vendor proposal is pursued. Recalculate the project NPV and discounted ROI if the tax benefits of the depreciation of the capital expense are not available to the project?

Does this change your recommendation to proceed with the project? Why or why not?

If you are unsure about these calculations, the downloadable example might be helpful.

Sample DCF Model

In calculating the project ROI, include the cost of the hardware and installation costs in the initial investment as capital costs should include any costs related to delivery, setup, and configuration of the capital asset.

Under these assumptions, would you recommend pursuing the project? How sensitive are the project returns to the tax benefit of the depreciation expense that would occur with the vendor solution?