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A manager’s role is to evaluate capital investment projects

Part of a manager’s role is to evaluate capital investment projects to choose the best return on investment. In this assignment, you will use capital budgeting techniques to make an investment decision and present your findings in a PowerPoint presentation.

Scenario

For this assignment, you will take on the role of a manager for Shoals Corporation. Shoals is a company that uses backhoes to complete its work. You will analyze the information provided here and then create a presentation to communicate your recommendation to company leaders.

The Shoals Corporation puts significant emphasis on cash flow when planning capital investments. The company chose its discount rate of 8 percent based on the rate of return it must pay its owners and creditors. Using that rate, Shoals Corporation then uses different methods to determine the most appropriate capital outlays.

This year, Shoals Corporation is considering the following capital investment: buying five new backhoes to replace the backhoes it now owns. The new backhoes are faster, cost less to run, provide for more accurate trench digging, have comfort features for the operators, and have 1-year maintenance agreements to go with them. The old backhoes are working just fine, but they do require considerable maintenance. The backhoe operators are very familiar with the old backhoes and would need to learn some new skills to use the new backhoes.

Use the following information in deciding whether to purchase the new backhoes:

Backhoes

Old Backhoes

New Backhoes

Purchase cost when new

$90,000

$200,000

Salvage value now

$42,000

Investment in major overhaul needed in next year

$55,000

Salvage value in 8 years

$15,000

$90,000

Remaining life

8 years

Net cash flow generated each year

$30,425

$43,900

Instructions

Complete a PowerPoint presentation in which you calculate different measures of return on investment, analyze how the results influence a proposed investment decision, and make a recommendation based on your findings. You may download the Week 5 Assignment Template Download Week 5 Assignment Template or create your own PowerPoint presentation.

(Hint: For the old machine, the initial investment is the cost of the overhaul. For the new machine, subtract the salvage value of the old machine to determine the initial cost of the investment.)

Slide 1. Use Excel to calculate the net present value of the old backhoes and the new backhoes. Save your Excel file and then insert the Excel file into the PowerPoint presentation. (Use the video linked in the Resources or follow these commands in Excel: Insert>Object>Create from File>Browse: Select your saved Excel file.)

Slide 2. Evaluate the results of the net present value calculations and how they influence the decision about purchasing new backhoes or keeping the old backhoes. Double-check that your calculations on Slide 1 are correct.

Slide 3. Use Excel to calculate the payback period for keeping the old backhoes and purchasing the new backhoes. (Hint: For the old machines, evaluate the payback of an overhaul.) Save your Excel file and then insert the Excel file into the PowerPoint presentation. (Use the video linked in the Resources or follow these commands in Excel: Insert>Object>Create from File>Browse: Select your saved Excel file.)

Slide 4. Evaluate the results of the payback period calculations and how they influence the decision about whether the company should purchase new backhoes or continue using the old backhoes. Double-check that your calculations on Slide 3 are correct.

Slide 5. Using Excel, calculate the profitability index for keeping the old backhoes and purchasing new backhoes. Save your Excel file and then insert the Excel file into the PowerPoint presentation. (Use the video linked in the Resources or follow these commands in Excel: Insert>Object>Create from File>Browse: Select your saved Excel file.)

Slide 6. Evaluate the results of your profitability index calculations and how they influence your decision about whether the company should purchase new backhoes or continue using the old backhoes. Double-check that your calculations on Slide 5 are correct.

Slide 7. Explain at least 3 intangible benefits that influence the decision to purchase new backhoes.

Slide 8. Recommend whether the company should purchase new backhoes or keep the old backhoes. Your recommendation should be consistent with your calculations and analysis in Slides 1-6 and intangibles in Slide 7.

Full Answer Section

Calculations

Initial Investment:

Old Backhoes: $55,000 (overhaul cost)
New Backhoes: $200,000 - $42,000 (salvage value of old) = $158,000

Net Present Value (NPV):

Use the NPV function in Excel to calculate the present value of cash inflows and outflows for both options.
Discount rate is 8%.

Payback Period:

Calculate the time it takes for the initial investment to be recovered from net cash inflows.

Profitability Index:

Divide the present value of future cash flows by the initial investment.

PowerPoint Slides

Slide 1: Title Slide

Title: Capital Investment Analysis: New vs. Old Backhoes
Your Name
Date

Slide 2: Net Present Value (NPV)

Present the NPV calculations for both options in a clear table format.
Explain the meaning of NPV and how it helps in decision making.

Slide 3: NPV Analysis and Decision

Compare the NPV of both options.
Explain which option has a higher NPV and why it is preferred based on the NPV results.

Slide 4: Payback Period

Present the payback period calculations for both options in a clear table format.
Explain the meaning of payback period and how it helps in decision making.

Slide 5: Payback Period Analysis and Decision

Compare the payback periods of both options.
Explain which option has a shorter payback period and how it influences the decision.

Slide 6: Profitability Index

Present the profitability index calculations for both options in a clear table format.
Explain the meaning of profitability index and how it helps in decision making.

Slide 7: Profitability Index Analysis and Decision

Compare the profitability index of both options.
Explain which option has a higher profitability index and how it influences the decision.

Slide 8: Intangible Benefits and Final Recommendation

List intangible benefits of new backhoes (e.g., increased efficiency, improved operator comfort, reduced maintenance).
Weigh the tangible and intangible factors and make a final recommendation.

Making the Decision

The final decision should be based on a combination of financial metrics and intangible factors. While NPV is generally considered the most reliable method, payback period and profitability index can provide additional insights. Consider the company's risk tolerance, strategic goals, and long-term perspective.

Remember to replace placeholder text with actual calculations and analysis.

By following these steps and carefully analyzing the data, you can make a well-informed recommendation to Shoals Corporation.

Sample Answer

We are tasked with evaluating the financial viability of replacing old backhoes with new ones for Shoals Corporation. This involves calculating several financial metrics (NPV, Payback Period, Profitability Index) and considering intangible factors.

Data Analysis and Calculations

Note: Due to the limitations of this text-based format, I cannot directly embed Excel files into a PowerPoint presentation. However, I can provide detailed calculations and explanations, which you can then input into Excel and visualize in your PowerPoint.