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Illustrate concepts related to capital budgeting analysis of projects. Certain aspects of a capital
project may have not been included in order to help highlight basic concepts, such as
Net Present Value. The spreadsheet is setup to evaluate six different projects and summarize
all projects based on both economic analysis and risk factors assigned.
Note: The Solver feature of Excel is used in an example at the end. Please make sure that you
have installed Solver: Solver add-on feature (Tools => Add-Ins => Solver).
Economic Analysis
Three economic criteria are applied to projects: Net Present Value, Modified Internal Rate of
Return and Discounted Payback Period. If your project(s) have non-periodic payments
(payments are not equal over the life of the project), then you should use these Excel Functions:
=XNPV for Net Present Value by entering specific dates of cash flows
=XIRR for Internal Rate of Return by entering specific dates of cash flows
Cell Indicators
Selected input cells (not all input cells are highlighted since each project is unique)
Cell includes a comment - move mouse and point over cell for comment
Indication of an error in calculation or a red flag that a criteria has not been met
Organization of Spreadsheet
Lead Worksheet
Project A Analysis - Example with Annual Cash Flow Calculations
Project B Analysis - Example with Sunk Costs & Projected Financials
Project C Analysis - Example of Upgrade Investment
Project D Analysis - Example of Project Financing
Project E Analysis - Example of Foreign Investment
Project F Analysis - Example of Monthly Inflows / Outflows
Summary and Example of Using Excel Solver
Answer Report 1 - Output from Using Excel Solver in Summary Example
General Input
The following general inputs have been used on different worksheets:
* If you expect changes in future tax rates, you may want to consider these changes
in your analysis.
Priority Code:
1 Carry over project, already in progress, requires additional funding
2 Essential for continued operations, regulatory compliance, etc.
3 Economically desired for revenue growth, cost reductions, etc.
4 General improvement for building or expanding the business
ial for Short Course 3: Capital
, located on the internet at
aining. Prepared by: Matt H.
CFM
Lead Wks
Project A
Project B
Project C
Project D
Project E
Project F
Summary
mal project analysis
Capital Budgeting Analysis for
Medical Services USA
A Diesel Generation System
Project Information
Project Description > New diesel backup system for high volume medical plant
Project Benefits > Eliminate downtime, improve efficiency, better service
Project Location > Mobile, AL
Responsible Division > Southern
Responsible Department > Plant Engineering
Contact Person Name > John Pearson, Southern Div Manager
Estimated Project Start Date > 01/01/92
Classification > 4
Justification > F
Priority > 2
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1 Project improves overall profitability of the company 2
F2 Project lowers cost structure 3
F3 Project will generate a rate of return 3
F4 Project improves asset utilization 1
F5 Other Financial Attribute __________________________________ 0
F6 Other Financial Attribute __________________________________ 0
Operating Attributes:
O1 Improves operating efficiencies 4
O2 Increases the customer base 0
O3 Improves overall customer service 0
O4 Improves competitive position of company 0
O5 Other Operating Attribute _________________________________ 0
O6 Other Operating Attribute _________________________________ 0
Contingency Attributes:
C1 Project has options that allow for change during life 2
C2 Project will positively impact company even if value is negative 4
C3 Project can be abandoned easily with some positive value 1
C4 Project permits several options to maximize value 2
C5 Other Cont Attribute _____________________________________ 0
Miscellaneous Attributes:
M1 Expands Human Resource Capital 0
M2 Enhances workforce productivity 0
M3 Project meets a critical regulatory, security or specific need 0
M4 Project fits with company strategy and goals 1
M5 Probability of project success is very high / low risk 4
M6 Other Misc Attribute _____________________________________ 0
M7 Other Misc Attribute _____________________________________ 0
M8 Other Misc Attribute _____________________________________ 0
Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Financial Analysis
* capitalized costs subject to depreciation using double declining method over 8 years with $ 8,000 salvag
NOTE: Depreciation for tax purposes is considered the same for accounting purposes. If tax depreciatio
different than accounting depreciation, deduct tax depreciation in calculating taxes.
Year 2:
Reductions in annual operating costs 32,100
New revenues from higher output volumes 6,900
Eliminate third party vendor service 35,000
Annual service and maintenance (5,000)
Annual fuel costs (1,800)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 2 (34,356)
Operating Cash Flow in Year 2 32,844
Less Taxes (9,032)
Net Income - Year 2 23,812
Add Back Non Cash Depreciation 34,356
Change to Net Working Capital (650)
Net Cash Flow - Year 2 57,518
Year 3:
Reductions in annual operating costs 34,800
New revenues from higher output volumes 7,100
Eliminate third party vendor service 35,000
Annual service and maintenance (5,000)
Annual fuel costs (2,000)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 3 (25,767)
Operating Cash Flow in Year 3 44,133
Less Taxes (12,137)
Net Income - Year 3 31,997
Add Back Non Cash Depreciation 25,767
Change to Net Working Capital (550)
Net Cash Flow - Year 3 57,213
Year 4:
Reductions in annual operating costs 37,200
New revenues from higher output volumes 7,900
Eliminate third party vendor service 0
Annual service and maintenance (5,200)
Annual fuel costs (2,100)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 4 (19,325)
Operating Cash Flow in Year 4 18,475
Less Taxes (5,081)
Net Income - Year 4 13,394
Add Back Non Cash Depreciation 19,325
Change to Net Working Capital (250)
Net Cash Flow - Year 4 32,469
Year 5:
Reductions in annual operating costs 40,900
New revenues from higher output volumes 8,900
Eliminate third party vendor service 0
Annual service and maintenance (5,300)
Annual fuel costs (2,200)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 5 (14,494)
Operating Cash Flow in Year 5 27,806
Less Taxes (7,647)
Net Income - Year 5 20,160
Add Back Non Cash Depreciation 14,494
Change to Net Working Capital (350)
Net Cash Flow - Year 5 34,303
Year 6:
Reductions in annual operating costs 44,200
New revenues from higher output volumes 9,700
Eliminate third party vendor service 0
Annual service and maintenance (5,400)
Annual fuel costs (2,300)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 6 (10,870)
Operating Cash Flow in Year 6 35,330
Less Taxes (9,716)
Net Income - Year 6 25,614
Add Back Non Cash Depreciation 10,870
Change to Net Working Capital (150)
Net Cash Flow - Year 6 36,334
Year 7:
Reductions in annual operating costs 50,100
New revenues from higher output volumes 10,200
Eliminate third party vendor service 0
Annual service and maintenance (5,500)
Annual fuel costs (2,400)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 7 (8,153)
Operating Cash Flow in Year 7 44,247
Less Taxes (12,168)
Net Income - Year 7 32,079
Add Back Non Cash Depreciation 8,153
Change to Net Working Capital (150)
Net Cash Flow - Year 7 40,082
Year 8:
Reductions in annual operating costs 55,500
New revenues from higher output volumes 11,000
Rebuild / Repair Unit Option (25,000)
Annual service and maintenance (4,600)
Annual fuel costs (2,600)
Depreciation:
Cost 183,230
Salvage Value 8,000
Useful Life 8
Depreciation in Yr 8 (6,115)
Operating Cash Flow in Year 8 28,185
Less Taxes (7,751)
Net Income - Year 8 20,434
Add Back Non Cash Depreciation 6,115
Change to Net Working Capital (50)
Net Cash Flow - Year 8 26,499
Terminal Year 9
Salvage Value of Asset 5,000
Working Capital Reversed 2,500
Terminal Value 7,500
At the end of Year 8, a decision will be made to either rebuild the asset or outsource to third party.
Economic Analysis
Economic Assessment
Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.
Risk Analysis
Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond 1.00 (a)
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10) 1 (b)
Exponential power to apply to Risk Ranking is 2 - (a) 1 (c)
Risk Factor = (b) raised to the power (c) 1
Standard Coeff of
Net Cash Flows Expected Deviation Variation
Year Pesimist Normal Optomist Value (Abs Risk) (Rel Risk)
1 41,800 55,497 64,900 53,483 17,758 0.332
2 39,750 57,518 67,300 54,543 21,584 0.396
3 37,400 57,213 66,100 53,593 22,854 0.426
4 26,200 32,469 41,050 32,189 10,699 0.332
5 21,050 34,303 40,900 31,979 15,679 0.490
6 13,200 36,334 39,800 31,071 22,531 0.725
7 11,800 40,082 40,800 33,119 25,430 0.768
8 8,100 26,499 35,700 23,279 21,793 0.936
Terminal 1,000 7,500 8,500 6,025 6,346 1.053
Totals 200,300 347,416 405,050 319,282 164,674 0.516
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1 Project improves overall profitability of the company 3
F2 Project lowers cost structure 2
F3 Project will generate a rate of return 4
F4 Project improves asset utilization 2
F5 Other Financial Attribute __________________________________ 0
F6 Other Financial Attribute __________________________________ 0
Operating Attributes:
O1 Improves operating efficiencies 2
O2 Increases the customer base 3
O3 Improves overall customer service 3
O4 Improves competitive position of company 2
O5 Other Operating Attribute _________________________________ 0
O6 Other Operating Attribute _________________________________ 0
Contingency Attributes:
C1 Project has options that allow for change during life 0
C2 Project will positively impact company even if value is negative 0
C3 Project can be abandoned easily with some positive value 0
C4 Project permits several options to maximize value 0
C5 Other Cont Attribute _____________________________________ 0
Miscellaneous Attributes:
M1 Expands Human Resource Capital 0
M2 Enhances workforce productivity 0
M3 Project meets a critical regulatory, security or specific need 0
M4 Project fits with company strategy and goals 3
M5 Probability of project success is very high / low risk 0
M6 Other Misc Attribute _____________________________________ 0
M7 Other Misc Attribute _____________________________________ 0
M8 Other Misc Attribute _____________________________________ 0
Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Financial Analysis
(1): Depreciated over 30 years using the straight line method with no salvage value.
(2): Depreciated over 12 years using the declining balance method with no salvage value.
Tax depreciation and accounting depreciation are considered the same.
Cash 3,500
Accounts Receivable 7,500
Inventories 5,000
Total Current Assets 16,000
Accounts Payable 6,000
Other accruals 4,000
Total Current Liab 10,000
Net Working Capital 6,000
Sales Revenues 60,000
Ratio (NWC / Sales) 10.00%
As a result of this project investment, the company expects some negative impact to its
Topeka, Kansas facility as follows:
Year 1 Year 2 Year 3
Reduction to Sales Revenues (4,000) (5,000) (3,000)
Reductions in overall cost 1,500 2,000 1,200
Net Reduction to Income (2,500) (3,000) (1,800)
Economic Analysis
Economic Assessment
Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.
Risk Analysis
Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond 1.00
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10) 1
Exponential power to apply to Risk Ranking is 2 - (a) 1
Risk Factor = (b) raised to the power (c) 1
Standard Coeff of
Net Cash Flows Expected Deviation Variation
Year Pesimist Normal Optomist Value (Abs Risk) (Rel Risk)
1 8,650 14,494 26,800 13,064 13,845 1.060
2 6,800 10,779 27,500 10,223 15,031 1.470
3 7,900 17,723 33,200 15,059 19,774 1.313
4 8,600 30,696 37,800 23,317 25,865 1.109
5 8,100 30,634 43,900 23,410 30,422 1.300
6 7,500 34,197 42,100 25,248 30,794 1.220
7 7,100 33,845 41,850 24,884 30,908 1.242
8 6,200 35,043 40,950 25,243 31,501 1.248
9 6,000 36,604 40,200 26,072 31,630 1.213
10 5,500 36,914 39,900 26,068 31,993 1.227
11 5,100 31,450 37,750 22,543 29,386 1.304
12 4,900 31,450 35,950 22,383 28,367 1.267
13 4,250 31,450 34,150 22,065 27,779 1.259
14 3,705 31,450 32,990 21,816 27,520 1.261
15 3,250 31,450 31,650 21,590 27,054 1.253
16 2,680 31,450 31,280 21,372 27,349 1.280
17 2,005 31,450 31,000 21,122 27,806 1.316
18 1,490 31,450 30,850 20,934 28,197 1.347
19 1,105 31,450 29,990 20,756 27,986 1.348
20 790 31,450 28,750 20,584 27,454 1.334
Totals 101,625 595,428 698,560 427,753 540,660 1.264
alvage value.
Year 4 Year 5
(1,500) (500)
700 100
(800) (400)
Terminal
Year Year Year Year Year Year Year Flow
4 5 6 7 8 9 10 11 to 20
125,000 135,000 140,000 145,000 149,000 153,000 155,000 160,000
(a)
(b)
(c)
Capital Budgeting Analysis for
Medical Services USA
C Upgrade to DuBois Center
Project Information
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1 Project improves overall profitability of the company
F2 Project lowers cost structure
F3 Project will generate a rate of return
F4 Project improves asset utilization
F5 Other Financial Attribute __________________________________
F6 Other Financial Attribute __________________________________
Operating Attributes:
O1 Improves operating efficiencies
O2 Increases the customer base
O3 Improves overall customer service
O4 Improves competitive position of company
O5 Other Operating Attribute _________________________________
O6 Other Operating Attribute _________________________________
Contingency Attributes:
C1 Project has options that allow for change during life
C2 Project will positively impact company even if value is negative
C3 Project can be abandoned easily with some positive value
C4 Project permits several options to maximize value
C5 Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1 Expands Human Resource Capital
M2 Enhances workforce productivity
M3 Project meets a critical regulatory, security or specific need
M4 Project fits with company strategy and goals
M5 Probability of project success is very high / low risk
M6 Other Misc Attribute _____________________________________
M7 Other Misc Attribute _____________________________________
M8 Other Misc Attribute _____________________________________
Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Upgrade Investment will result in additional 5,000 billable hours per month
New Services from Upgrade Investment are billable to customers at $ 50.00 per hour
Capacity after upgrade => 14,000
Does upgrade project exceed max? No
Financial Analysis
Due to the rapid changes in services provided by this upgrade investment project, no term
calculated for the periods beyond year 10.
Economic Analysis
Economic Assessment
Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.
Risk Analysis
Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Standard
Net Cash Flows Expected Deviation
Year Pesimist Normal Optomist Value (Abs Risk)
1 212,500 256,875 285,700 252,324 54,978
2 242,500 295,578 324,300 289,271 62,301
3 301,200 334,811 362,050 332,174 44,892
4 326,700 374,625 401,200 369,026 56,638
5 370,900 416,074 441,300 410,823 53,493
6 411,800 459,215 483,700 453,405 54,949
7 461,900 504,105 533,100 500,013 53,239
8 510,200 550,802 582,200 547,391 53,323
9 561,300 599,369 631,100 596,515 51,374
10 615,100 649,868 677,700 647,089 46,230
4,014,100 4,441,320 4,722,350 4,398,031 531,419
4
3
3
2
0
0
0
0
0
0
0
0
0
0
2
3
0
0
0
31
1.03
1.02
0.7
4
1.3
6
20.00%
65.00%
15.00%
100.00%
Coeff of
Variation
(Rel Risk)
0.218
0.215
0.135
0.153
0.130
0.121
0.106
0.097
0.086
0.071
0.121
Capital Budgeting Analysis for
Medical Services USA
D Southeastern Upgrades
Project Information
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1 Project improves overall profitability of the company
F2 Project lowers cost structure
F3 Project will generate a rate of return
F4 Project improves asset utilization
F5 Other Financial Attribute __________________________________
F6 Other Financial Attribute __________________________________
Operating Attributes:
O1 Improves operating efficiencies
O2 Increases the customer base
O3 Improves overall customer service
O4 Improves competitive position of company
O5 Other Operating Attribute _________________________________
O6 Other Operating Attribute _________________________________
Contingency Attributes:
C1 Project has options that allow for change during life
C2 Project will positively impact company even if value is negative
C3 Project can be abandoned easily with some positive value
C4 Project permits several options to maximize value
C5 Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1 Expands Human Resource Capital
M2 Enhances workforce productivity
M3 Project meets a critical regulatory, security or specific need
M4 Project fits with company strategy and goals
M5 Probability of project success is very high / low risk
M6 Other Misc Attribute _____________________________________
M7 Other Misc Attribute _____________________________________
M8 Other Misc Attribute _____________________________________
Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Project Summary
Several facilities in the Southeast area need to upgrade existing scanner equipment to better serve customers
and produce higher quality analysis / treatments. The Atlanta Bank has agreed to finance $ 500,000 towards
the investment at 9% over a five year period. The loan repayment schedule is as follows:
Financial Analysis
(1): $ 650,000 of this price is subject to capitalization. Depreciation deducted on the tax return
differs from depreciation for accounting purposes: Tax Return Accounting
Year Depreciation Depreciation
1 325,000 65,000
2 162,500 65,000
3 81,250 65,000
4 40,625 65,000
5 40,625 65,000
6 65,000
7 65,000
8 65,000
9 65,000
10 65,000
Total 650,000 650,000
Economic Analysis #1
Present
Year Cash Flow Value Payback
0 (1,215,000) (1,215,000)
1 339,580 303,875 (911,125)
2 290,205 232,386 (678,739)
3 254,921 182,668 (496,071)
4 241,486 154,846 (341,225)
5 227,256 130,400 (210,825)
6 207,148 106,364 (104,461)
7 200,010 91,901 (12,560)
8 192,395 79,107 66,547 payback
9 185,098 68,104 134,651
10 184,408 60,716 195,367
11 179,050 52,754 248,120
12 173,284 45,686 293,807
13 167,963 39,627 333,434
14 166,665 35,187 368,621
15 165,223 31,214 399,835
Net Present Value 399,835
Economic Analysis #2
Present
Year Cash Flow Value Payback
0 (1,215,000) (1,215,000)
1 223,409 209,724 (1,005,276)
2 171,966 151,544 (853,731)
3 134,428 111,208 (742,523)
4 118,536 92,054 (650,469)
5 101,628 74,089 (576,380)
6 207,148 141,766 (434,614)
7 200,010 128,496 (306,118)
8 192,395 116,033 (190,085)
9 185,098 104,794 (85,291)
10 184,408 98,008 12,718 payback
11 179,050 89,332 102,050
12 173,284 81,159 183,209
13 167,963 73,849 257,058
14 166,665 68,790 325,848
15 165,223 64,017 389,865
Net Present Value 389,865
Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.
Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond 1.00
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10) 1
Exponential power to apply to Risk Ranking is 2 - (a) 1
Risk Factor = (b) raised to the power (c) 1
Standard Coeff of
Net Cash Flows Expected Deviation Variation
Year Pesimist Normal Optomist Value (Abs Risk) (Rel Risk)
1 321,100 339,580 361,200 342,056 30,106 0.088
2 271,600 290,205 311,950 292,694 30,291 0.103
3 237,200 254,921 276,705 257,506 29,762 0.116
4 224,850 241,486 261,890 243,903 27,901 0.114
5 211,800 227,256 248,605 229,980 27,951 0.122
6 190,450 207,148 227,690 209,586 28,057 0.134
7 184,100 200,010 220,280 202,473 27,325 0.135
8 176,350 192,395 211,650 194,642 26,549 0.136
9 169,150 185,098 204,880 187,459 26,935 0.144
10 168,340 184,408 203,090 186,537 26,078 0.140
11 163,100 179,050 197,450 181,135 25,763 0.142
12 158,350 173,284 192,770 175,688 26,038 0.148
13 153,300 167,963 185,200 169,944 23,958 0.141
14 152,820 166,665 183,990 168,746 23,512 0.139
15 152,650 165,223 183,690 167,659 23,671 0.141
Totals 2,935,160 3,174,689 3,471,040 3,210,006 403,897 0.126
Absolute Risk of Project (Std Deviation) 403,897
Relative Risk of Project (Coeff of Variation) 0.126
5
1
2
3
0
0
0
1
1
0
0
0
2
0
2
2
0
0
0
32
Tax Benefit
of Interest
12,375
10,307
8,053
5,597
2,919
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1 Project improves overall profitability of the company
F2 Project lowers cost structure
F3 Project will generate a rate of return
F4 Project improves asset utilization
F5 Other Financial Attribute __________________________________
F6 Other Financial Attribute __________________________________
Operating Attributes:
O1 Improves operating efficiencies
O2 Increases the customer base
O3 Improves overall customer service
O4 Improves competitive position of company
O5 Other Operating Attribute _________________________________
O6 Other Operating Attribute _________________________________
Contingency Attributes:
C1 Project has options that allow for change during life
C2 Project will positively impact company even if value is negative
C3 Project can be abandoned easily with some positive value
C4 Project permits several options to maximize value
C5 Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1 Expands Human Resource Capital
M2 Enhances workforce productivity
M3 Project meets a critical regulatory, security or specific need
M4 Project fits with company strategy and goals
M5 Probability of project success is very high / low risk
M6 Other Misc Attribute _____________________________________
M7 Other Misc Attribute _____________________________________
M8 Other Misc Attribute _____________________________________
Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Project Summary
In order to establish a toehold position in the Toronto area, a joint venture investment will be
made since the current major provider in Toronto needs improved child care services for the
urban areas of Toronto. Medical Services USA will provide personnel and overall management
for urban child care. In return, Medical Services USA will share in the profits 50% / 50%. The Joint
Venture Agreement has a ten year term period.
Economic Assessment
Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.
Risk Analysis
Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Standard
Net Cash Flows Expected Deviation
Year Pesimist Normal Optomist Value (Abs Risk)
1 132,000 189,750 198,500 177,500 55,685
2 227,300 290,280 311,100 279,740 66,708
3 239,100 295,845 315,200 286,498 60,421
4 244,050 316,800 340,500 304,538 76,871
5 267,800 341,055 368,500 329,603 79,304
6 285,200 355,680 387,500 346,015 79,171
7 307,900 382,005 416,900 372,203 84,006
8 329,100 415,350 460,900 405,175 100,391
9 363,300 442,260 484,800 433,155 92,352
10 380,050 473,850 517,100 461,213 105,845
2,775,800 3,502,875 3,801,000 3,395,638 800,754
1
4
4
3
0
0
0
2
0
0
0
0
0
0
3
2
0
0
0
32
management
/ 50%. The Joint
Estimated
Cash 50% Convert
Flow Share to U.S.$ *
330,000 165,000 1.15 189,750
492,000 246,000 1.18 290,280
489,000 244,500 1.21 295,845
528,000 264,000 1.20 316,800
583,000 291,500 1.17 341,055
608,000 304,000 1.17 355,680
653,000 326,500 1.17 382,005
710,000 355,000 1.17 415,350
756,000 378,000 1.17 442,260
810,000 405,000 1.17 473,850
Project Risk Factor:
1.00 (a)
1 (b)
1 (c)
1
0.6
6
1.4
12
25.00%
50.00%
25.00%
100.00%
Coeff of
Variation
(Rel Risk)
0.314
0.238
0.211
0.252
0.241
0.229
0.226
0.248
0.213
0.229
0.236
Capital Budgeting Analysis for
Medical Services USA
F Regulatory Compliance NE
Project Information
Preliminary Review
Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the
attribute does not apply to the project. 5 is the highest rating, indicating that the project
strongly meets this project attribute.
Financial Attributes:
F1 Project improves overall profitability of the company
F2 Project lowers cost structure
F3 Project will generate a rate of return
F4 Project improves asset utilization
F5 Other Financial Attribute __________________________________
F6 Other Financial Attribute __________________________________
Operating Attributes:
O1 Improves operating efficiencies
O2 Increases the customer base
O3 Improves overall customer service
O4 Improves competitive position of company
O5 Other Operating Attribute _________________________________
O6 Other Operating Attribute _________________________________
Contingency Attributes:
C1 Project has options that allow for change during life
C2 Project will positively impact company even if value is negative
C3 Project can be abandoned easily with some positive value
C4 Project permits several options to maximize value
C5 Other Cont Attribute _____________________________________
Miscellaneous Attributes:
M1 Expands Human Resource Capital
M2 Enhances workforce productivity
M3 Project meets a critical regulatory, security or specific need
M4 Project fits with company strategy and goals
M5 Probability of project success is very high / low risk
M6 Other Misc Attribute _____________________________________
M7 Other Misc Attribute _____________________________________
M8 Other Misc Attribute _____________________________________
Projects with point totals less than 15 may represent poor investments and require additional
approval before further analysis and processing. Projects with point totals between 15 and 20
require caution and careful analysis. Projects with point totals greater than 20 may proceed
with analysis and submission.
Project Summary
A major regulatory change is expected to change certain services in the Northeastern United States.
In order to meet this new mandate, an investment is required in field personnel, training, and
equipment. Revenues from the new services are also forecasted based on demand in California
which adopted this regulatory change two years ago. The regulatory change is subject to future
modification and therefore, the project is only projected over two years on a month to month basis.
There is no initial investment required for this project.
Monthly
Period Setup Service Misc / Total Net Cash
Date Revenues Costs Costs Taxes Outflows Flow
Annual
Required Rate of Return for Project => 6.50%
Economic Assessment
Project must meet at least two of the three Economic Criteria, otherwise special
approval is required.
Risk Analysis
Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:
Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk
Probability of Accurate and Reliable Information - Gov't T Bond
Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10)
Exponential power to apply to Risk Ranking is 2 - (a)
Risk Factor = (b) raised to the power (c)
Standard
Net Cash Flows Expected Deviation
Month Pesimist Normal Optomist Value (Abs Risk)
1 12,050 13,129 13,700 13,081 1,200
2 26,200 28,589 29,900 28,493 2,684
3 28,830 31,486 32,920 31,374 2,971
4 31,390 34,545 36,050 34,373 3,417
5 32,710 35,761 37,430 35,637 3,425
6 32,600 35,626 37,250 35,497 3,379
7 34,170 37,505 39,250 37,354 3,699
8 35,870 39,113 40,900 38,984 3,648
9 36,275 39,673 41,470 39,523 3,780
10 36,510 39,839 41,680 39,708 3,748
11 36,810 40,218 42,050 40,073 3,808
12 35,860 39,083 40,920 38,967 3,660
Annual Sub Total 413,063
13 25,620 27,919 29,200 27,830 2,594
14 30,850 33,702 35,240 33,582 3,189
15 31,170 34,074 35,630 33,950 3,242
16 29,350 32,033 33,510 31,926 3,017
17 27,960 30,583 31,920 30,457 2,889
18 26,300 28,695 30,010 28,599 2,691
19 25,120 27,565 28,850 27,456 2,715
20 24,470 26,878 28,140 26,769 2,672
21 23,690 26,019 27,300 25,926 2,619
22 23,150 25,422 26,700 25,337 2,570
23 22,660 24,932 26,200 24,845 2,565
24 18,230 20,054 21,100 19,990 2,075
Annual Sub Total 336,665
687,845 752,443 787,320 749,729 72,259
Expected Present
Dates Values Value
1 13,129 13,058
2 28,589 28,282
3 31,486 30,979
4 34,545 33,807
5 35,761 34,808
6 35,626 34,490
7 37,505 36,113
8 39,113 37,458
9 39,673 37,791
10 39,839 37,744
11 40,218 37,898
12 39,083 36,629
13 27,919 26,025
14 33,702 31,247
15 34,074 31,422
16 32,033 29,381
17 30,583 27,900
18 28,695 26,036
19 27,565 24,876
20 26,878 24,126
21 26,019 23,229
22 25,422 22,573
23 24,932 22,019
24 20,054 17,615
Net Present Value 705,507
2
3
3
2
0
0
3
1
0
0
0
0
0
5
2
1
0
0
0
34
rn United States.
in California
to month basis.
Present Present
Value Value
(simple calc) (functional)
13,129 13,129
28,589 28,590
31,486 31,488
34,545 34,551
35,761 35,771
35,626 35,642
37,505 37,527
39,113 39,144
39,673 39,714
39,839 39,889
40,218 40,280
39,083 39,155
27,919 27,980
33,702 33,788
34,074 34,173
32,033 32,140
30,583 30,698
28,695 28,815
27,565 27,695
26,878 27,018
26,019 26,168
25,422 25,582
24,932 25,103
20,054 20,204
752,443 754,244
Monthly
0.54% Calculate IRR (annual basis):
erwise special
Compliance)
1.00 (a)
1 (b)
1 (c)
1
0.75
4
1.25
6
15.00%
65.00%
20.00%
100.00%
0.093
0.095
0.095
0.095
0.095
0.094
0.099
0.100
0.101
0.101
0.103
0.104
0.096
Calculate IRR (annual basis):
Annual Annual
Outflow Inflow
-102,000 413,063
-109,250 336,665
Capital Budgeting Analysis for
Medical Services USA
Summarize Economic and Risk Analysis for All Projects
* Provide additional narrative information on "strategic" reasons for making this investment since the return is less t
Financial Modeling Textbooks provide useful examples of how Excel Solver can be used to solve for capital budget
set of constraints. The following example will illustrate how we could apply Solver for finding the right set of projects
Example:
Objective: Maximize Net Present Value of Projects
Contraints: Year 1: Only $ 200,000 can be spent on all capital projects
Year 2: Only $ 150,000 can be spent on all capital projects
Year 3: Only $ 120,000 can be spent on all capital projects
Year 4: Only $ 100,000 can be spent on all capital projects
Year 5: Only $ 75,000 can be spent on all capital projects
Five Projects require investments over five years and have the following Net Present Values:
Select?
Project 0 = No < - - - - - Five Year Capital Budgets for Each Project - -
Ref 1 = Yes Project Name NPV Year 1 Year 2 Year 3
Each of the above constraints recognizes that we can spend no more than what is budgeted each year. We also
have the equation we are trying to solve for:
We will also use as our variables "0" for No and "1" for Yes as to which projects we should select given the above
constraints and equation. The "maximum" NPV will show up in our "set" cell which is cell D43.
Now go to the main toolbar, select Tools -> Solver and enter the following:
ent since the return is less than the cost of investments (cost of capital).
35,000 35,000
58,000 55,000
18,000 17,000
28,000 27,000
40,000 40,000
77,154 75,000
100,000 75,000
Adjustable Cells
Cell Name Original Value Final Value
$B$38 A 1 = Yes 0 1
$B$39 B 1 = Yes 0 0
$B$40 C 1 = Yes 0 1
$B$41 D 1 = Yes 0 1
$B$42 E 1 = Yes 0 0
Constraints
Cell Name Cell Value Formula Status Slack
$E$43 Total (SumProduct) Year 1 99,051 $E$43<=$E$44 Not Binding 100948.7
$F$43 Total (SumProduct) Year 2 85,282 $F$43<=$F$44 Not Binding 64717.94
$G$43 Total (SumProduct) Year 3 83,672 $G$43<=$G$44 Not Binding 36328.21
$H$43 Total (SumProduct) Year 4 77,154 $H$43<=$H$44 Not Binding 22846.16
$I$43 Total (SumProduct) Year 5 75,000 $I$43<=$I$44 Binding 0
$B$38 A 1 = Yes 1 $B$38=binary Binding 0
$B$39 B 1 = Yes 0 $B$39=binary Binding 0
$B$40 C 1 = Yes 1 $B$40=binary Binding 0
$B$41 D 1 = Yes 1 $B$41=binary Binding 0
$B$42 E 1 = Yes 0 $B$42=binary Binding 0