Essay Valuing Capital Investment Projects

2052 Words Nov 20th, 2014 9 Pages
Harvard Business School

9-298-092
Rev. December 4, 1998

Valuing Capital Investment Projects
1.

Growth Enterprises, Inc. (GEI) has $40 million that it can invest in any or all of the four capital investment projects, which have cash flows as shown in Table 1 below.

Table 1
Comparison of Project Cash Flows* ($ thousands)

Year of Cash Flow
Project
A.

B.

C.

D.

Type of
Cash Flow

Year 0

Investment
Revenue
Operating expenses

($10,000)

Investment
Revenue
Operating expenses

($10,000)

Investment
Revenue
Operating expenses

($10,000)

Investment
Revenue
Operating expenses

($10,000)

Year 1

Year 2

Year 3

$21,000
11,000

$15,000
5,833

$17,000
7,833

$10,000
5,555

$11,000
4,889

$30,000
15,555

$30,000
15,555

$10,000
5,555

$5,000
…show more content…
(Except for changes in net working capital, which must be made before the start of each sales year, you should assume that all cash flows occur at the end of the year in question.) What is its internal rate of return?

C.

Should Electronics Unlimited introduce the new product?

You are the CEO of Valu-Added Industries, Inc. (VAI). Your firm has 10,000 shares of common stock outstanding, and the current price of the stock is $100 per share. There is no debt; thus, the “market value” balance sheet of VAI appears as follows:
VAI Market Value Balance Sheet
$1,000,000 Equity

Assets

$1,000,000

You then discover an opportunity to invest in a new project that produces positive net cash flows with a present value of $210,000. Your total initial costs for investing and developing this project are only $110,000. You will raise the necessary capital for this investment by issuing new equity. All potential purchasers of your common stock will be fully aware of the project’s value and cost, and are willing to pay “fair value” for the new shares of VAI common. 4.

A.

What is the net present value of this project?

B.

How many shares of common stock must be issued, and at what price, to raise the required capital? C.

What is the effect, if any, of this new project on the value of the stock of the existing shareholders? Lockheed Tri Star and Capital Budgeting1
In 1971, the American aerospace company, Lockheed, found itself in

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