Evaluating the Best Use of Funds for Capital Investments Data analytics can be used to evaluate the best use of funds for capital investments. Joe Fox is the manager of the Gear division and plans to


Evaluating the Best Use of Funds for Capital Investments

Data analytics can be used to evaluate the best use of funds for capital investments. Joe Fox is the manager of the Gear division and plans to submit a proposal for an expanded production area. Joe has projected various conditions for revenues and expenses for the expansion, including different sizes and quality components. Knowing that the effect will likely differ under each, Joe plans to submit a conservative estimate for his proposed capital budgeting project this year to avoid a repeat of an unfavorable post-audit evaluation as occurred two years ago. Joe has provided the following data to be used in the analysis of selecting the proposal to be submitted to the capital budget committee.

Required rate of return: 6.0%

Table of useful lives and cash flows for different capital budgeting scenarios (Dollar amounts in thousands)

Project Scenario

Years of Useful Life

Net Initial Investment

Operating Cash Flows Year 1

Operating Cash Flows Year 2

Operating Cash Flows Year 3

Operating Cash Flows Year 4

Operating Cash Flows Year 5

Operating Cash Flows Year 6

A

6

$(43,869)

$  9,006

$  9,564

$  8,831

$  9,557

$  9,143

$  8,906

B

6

    (51,967)

11,372

12,042

11,259

11,517

11,880

10,758

C

4

      (46,516)

12,414

12,970

12,586

11,730

D

4

      (51,118)

14,982

12,853

13,817

14,031

E

5

      (71,715)

15,237

17,496

17,826

15,962

17,682

F

4

      (49,709)

13,054

12,078

13,866

13,686

G

4

      (55,519)

15,361

13,898

15,514

15,491

H

6

      (46,336)

10,422

10,050

9,228

10,221

10,725

9,079

I

5

      (53,417)

12,843

13,283

12,562

11,670

12,677

J

5

      (60,032)

12,845

12,328

10,734

10,113

10,960

K

6

      (51,321)

10,630

8,576

9,787

8,273

9,265

10,909

L

5

      (67,073)

13,627

12,263

13,931

13,080

12,984

M

4

      (43,994)

9,537

8,490

8,690

9,395

N

5

      (39,793)

9,526

9,079

9,779

10,746

8,277

Joe Fox is the manager of the Gear division and plans to submit a proposal for an expanded production area. Joe has projected various conditions for revenues and expense for the expansion, including different sizes and quality components. Knowing that the effect will likely differ under each, Joe plans to submit a conservative estimate for his proposed capital budgeting project this year to avoid a repeat of an unfavorable post-audit evaluation as occurred two years ago. Joe has provided the following data to be used in the analysis of selecting the proposal to be submitted to the capital budget committee.

Use the following template:

  • Module 6 CTA Excel File TemplateDownload Module 6 CTA Excel File Template

Requirements

There are three parts to this problem. Use Excel to perform the following:

  1. Use Excel’s IRR function to calculate IRR for each project scenario.
  2. Create a column chart that illustrates the IRR for each project. Include a descriptive chart title and axes labels in the chart.
  3. Examine the chart. Which project scenarios are acceptable? Which project scenario would you recommend that Joe submit to the capital budget committee? Justify your response. Be specific.

Submit the provided Excel spreadsheet containing your answers to each of the above requirements. Use Excel functions to make any required calculations described in the requirements. Post your completed Excel spreadsheet containing your answers for your instructor to grade. Submit a Word file detailing your answer to part 4 above to indicate and explain any relationships you identify from examining the chart you prepare and your responses to parts 1 and 2.