Evaluate Proposed Production Locations And Calculate NPV, IRR, ROI And Profitability Index
Question
Garrison Appliances, Inc., is considering expanding its international presence. It sells 25% of all the toaster ovens sold in the United States, but only 3% of the toaster ovens sold outside of the United States. The company believes that it can sell more of its product if it has a production facility located overseas. Estimates concerning two possible locations, Mumbai and Bangalore, follow:
|
Possible Location |
Mumbai |
Bangalore |
|
Initial cash outlay |
$5,000,000 |
$2,800,000 |
|
Useful life |
20 years |
20 years |
|
Net cash inflows excluding depreciation |
$1,100,000 |
$860,000 |
|
The cost of capital |
9% |
9% |
|
Tax rate |
40% |
40% |
Evaluate each of the proposed locations using each of the following: 1) average rate of return on investment, 2) payback period, 3) net present value, 4) profitability index, and 5) internal rate of return. Prepare a written report for the board of directors detailing exactly how you computed each item for each proposal and then explain in detail the conclusion you reached regarding the feasibility of each proposal. If the board decides to invest in only one location, explain which one it should be and why. What other factors should be considered before making a decision and why? What HRM considerations might be included in this specific capital budgeting analysis? Be specific, how could cash inflows and outflows be analyzed.
Summary
The question belongs to Finance and it discusses about evaluation of proposed locations, average rate of return on investment, payback period, net present value, profitability index and internal rate of return.
Total Word Count 651