MBA 604 Topic 5 Assignment – FirstRate Company

QUESTION

FirstRate Company

M E M O R A
N D U M

Date:

[Date Submitted]

To:

Paul Samuelson, President and CEO

From:

[Your name]

Subject:

Investment Recommendations

Purpose

The purpose of this memorandum is to evaluate each of
the investment opportunities set forth below using present value concepts and
present my recommendations based on my financial calculations and other
factors that warrant your consideration.
I understand that, based on my recommendations, the
company will allocate up to $1,000,000
of available capital to the superior investment opportunities. The required rate of return (discount rate)
for new investments by the company is 10.0
percent. For the purposes of this analysis,
I have ignored income taxes, as
instructed.

Summary
and Conclusion(Limit the length of your summary and
conclusions to a maximum of 150 words)

Please provide
your word count here

Your summary and
conclusions (please do not modify the formatting, fonts, colors, and so forth
in this document template)

(Continued)

Description of Investment Alternatives
Analyzed

Investment alternative 1:
Purchase an
additional fabrication machine that will allow the company to expand output
of its principal product

The cost of the
machine is $250,000. I expect the
machine to generate the following additional future end-of-year operating cash
inflows:
Year 1: $150,000
Year 2: $100,000
Year 3: $60,000
I do not expect the
machine to have a residual value at the end of its three-year useful life.

Investment alternative 2:
Purchase a business
that is a major supplier of key raw materials used by the company in
manufacturing its principal product

The owner of the
supplier firm has indicated that he would be willing to sell his business for
$500,000. I expect this âvertical
integrationâ of the company to result in reduced material costs totaling $75,000
annually for the next 15 years. I do
not expect these savings to continue after 15 years.

Investment alternative 3:
Replace certain
manufacturing equipment with new equipment that would produce cleaner
emissions from operations

The cost of the
low-emission (replacement) equipment is $50,000 for each of the companyâs two
existing production lines, totaling $100,000 if the company installed the
equipment in both production lines. While
the company must comply with certain EPA regulations limiting release of
certain pollutants into the atmosphere, based on relevant emission measurements
made by the company, those regulations do not presently require the company
to install the new equipment. There do
not appear to be additional revenue or cost savings that the new equipment
will generate.

Investment alternative 4:
Purchase undeveloped
land zoned for commercial use

A land broker has
indicated that she expects future economic development in the community where
the land is located to lead to substantial appreciation in the landâs value
over the next decade. The cost of the
land is $200,000. While management
does not expect to develop the land for use in the companyâs
operations, I estimate the value of the land will appreciate by approximately
11.25 percent annually during the next five years to $341,000.

Investment alternative 5:
Purchase a bank
certificate of deposit (CD)

The largest bank
serving the companyâs local business community is currently offering an
interest rate of 5.5 percent on three-year CDs. The bank pays interest on its CDs to
depositors annually. The companyâs
investment policy limits deposits in any individual bank to a maximum of
$300,000.

Investment alternative 6:
Repay an existing bank loan outstanding

The company has a $200,000 loan outstanding from a
local community bank. The interest
rate on the loan is 11.5 percent (fixed).
Interest payments on the loan are due at the end of each year and the
loan balance matures in full in five years.

(Continued)

Present Value Calculations and Other
Factors Warranting Consideration(Limit the length
of your analysis of each investment alternative to a maximum of 100 words, excluding present value calculations)

Investment alternative 1:
Purchase an additional fabrication machine that will
allow the company to expand output of its principal product

Please describe
your present value calculations, here (for example, âThe net present value
[NPV] of this investment is $1,000, representing the total present value, $1,900,
of $500 cash to be received at the end of each of the next 5 years, less the
cost of the initial investment of $900.â)

Please provide
your narrative analysis of this investment alternative, here, including any
additional financial or nonfinancial factors warranting consideration

Investment alternative 2:
Purchase a business that is a major supplier of key raw
materials used by the company in manufacturing its principal product

Present value
calculations