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EC1401 Introduction To Business Economics And Finance

tag 0 Download 12 Pages / 2,925 Words tag 06-09-2021

Question:

Case Study Scenario

JK Products, Inc. is considering investing in either of two competing projects that will allow the firm to eliminate a production bottleneck and meet the growing demand for its products. The firm's engineering department narrowed the alternatives down-to two—Status Quo (SQ) and I High Tech (HT). Working with the accounting and finance personnel, the firm's CFO developed the following estimates of the cash flows for SQ and HT over the relevant six-year time horizon. The firm has an 11 percent required return and views these projects as equally risky. 

Being in the decision making phase, it is your responsibility as the financial manager of the firm to follow a certain methodology and perform a number of calculations in order to evaluate each alternative separately as an independent project.

  1. Evaluate and compare each investment opportunity, demonstrate and discuss the results, and make a recommendation for the most valuable investment, giving the pros and cons.

  2. Knowing that the project is a non-divisible one meaning that it must be evaluated in total, you need to examine the significance of such techniques under capital rationing to identify the greatest benefit the company can get, with its given capital.

  3. Draw the NPV profile for the two alternative investments on the same set of axes and use the diagram to explain whether the NPV and IRR show different preferences for these mutually exclusive projects. Discuss the difference in terms of both “scale problem” and “timing problem”.

  4. Given your answers in A, B, C develop a company news release in which you attempt as a financial manager to provide reasonable arguments for persuading the shareholders to approve the investment.
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