Essay on Valuing Capital Investment Projects Hbs

2755 Words Mar 31st, 2011 12 Pages
CASE 2:
VALUING CAPITAL INVESTMENT PROJECTS

CORPORATE FINANCE
GROUP Y

Growth Enterprises, Inc

When valuing any project, the free cash flows must be determined in order to be able to successfully implement any method of capital budgeting. Growth Enterprises is currently considering four projects. Each has an equal required initial investment of $10,000,000 which is followed by a set of cash flows different for each project. Depreciation figures for each project were calculated on a straight-line basis. For project A, we used a one year depreciation since we were only given the first year revenue, two years for project B and three years for projects C and D. The required taxes for each project were determining by calculating
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Electronics Unlimited

The product’s net present value at a 20% discount rate came out to be $4,589,666.92 which represents sufficient evidence for project to be accepted. The internal interest rate is 57.95%, a considerably large number that signifies future profitability for the project. Both methods demonstrate that acceptance of this project would be a profitable decision and Electronics Unlimited should introduce the new product. Compared to NPV, the development and test marketing costs are relatively low. If the project NPV is positive, the company can expect the project to participate in the R&D costs at a level equivalent to the NPV. The expected R&D contribution from industry, calculated above as industry NPV is discounted to the time of initiating the project. This industry R&D contribution, discounted to when the project began, is then subtracted from the entire R&D costs. In this case, the NPV is 3 times greater than R&D costs. For early-stage firms, it is reasonable to fund more on R&D departments. So, for those of firms with greater NPV, the company can afford to cost share the R&D effort or purchase a licensing arrangement at a level equal to the company NPV. Qualitative suggestions on improvement of capabilities were encouraging tax exemptions to understand materials

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