Valuing capctsital Investment projects Harvard Case Solution & Analysis

Valuing capital Investment projects Case Solution

Question 1


GUI has analysed different projects with their feasibility to perform well in the given situation, however the results indicate variations among these projects. It has been considered that project A is not a feasible for the company to follow because its net earnings are less than the proposed value of the project where depreciation has been taken during the life of three years of the projects, its value will be the same in all the years and salvage value will equals to zero at the end of life of the project.

The initial investment for all the projects is considered to be the same throughout the years, therefore it indicates that project A shows less importance for implementing it in the years asits net present value is less than the initial investment.Moreover,the total return subject to investment is also less than the total investment figure, therefore the company should decline this proposal.

On the other hand,project B can be considered as viable to the company asit produces enough cash flows to recover the initial investment in the beginning of the period. However, the total internal rate of return in case of 10% of discounted value is 54% greater than the original cost and 14% in the discounted rate of 35% respectively. The accounting return is greater than the initial cost, therefore the company should accept this project for future considerations.

In case of project C, it is best for the company to accept this project asit shows positive results as compared to other three projects. The present value under the project provides greater value in the end of the year, the payback period will recover after two years of time instead to cover all the years. The total net return on investment will be approximately two times higher than the initial investment, therefore the best option for the company is to accept this project instead of going to others.

The last project under the scenario is showing conservative results in the years where the best option for the company is to acquire in more discounted rate of cash flows and it is quite impressive as compared to the result of project C. Therefore, if the company will acquire more than two projects, then this can be suitable for it.

Question 2


From the analysis, it indicates that Electronics unlimited should not introduce its new products due to the potential threat of liquidity in the coming period. The results show that the sales volume will decline in the future, which poses a threat of liquidity in the working capital of the company. The initial sales volume will be assumed to be 13 million in the start with additional capital expenditures and cost of marketing the new product, however due to the initial investment, the company will not produce enough amount in the next year but try to maintain the same level of ratio. On the other hand,the current market situation was analysed to produce less sales volume in the last two budgeted years, which indicates that the company will be subject to liquidity problems due to less sales ratio and which can liquidate the working capital into cash for the recovery in the future. Therefore, it has been analysed that the company will not show positive results as compared to the market situation and will immediately convert the assets into cash.

Question 3


The proposed investment has been taken into consideration for the new investment through the equity shares where the company has decided to accept the opportunity of the new project that would be favourable to it in the near future. Therefore,in order to meet the initial investment requirement, the company decided to issue the additional shares in which the same price is offered as compared to the value of the share in the past....................

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