MBAFPX5014__Assessment2_2.docx MBAFPX5014 E

MBAFPX5014__Assessment2_2.docx  MBAFPX5014                                               Evaluation of Capital Projects: Drill Tech, Inc  Mariesha Ramnandan  Capella University  Executive Summary  Drill Tech, Inc is a mid-sized manufacturing company based in Minnesota. The company is looking to pursue a capital project to increase shareholder value. Drill Tech, Inc identified three potential project requests to pursue in the upcoming fiscal year. This report will evaluate each project to determine which will bring the most value to shareholders. We will use budgeting tools, such as net present value, internal rate of return, payback period, and profitability index to forecast future cash flows. We will also evaluate each project request by using data analysis and applicable metrics. Finally, we will select the best capital project that Drill Tech should pursue.  Summary of Each Capital Project Requests  Project A proposes a major equipment purchase that will cost $10 million but eventually reduce the cost of sales by 5% per year for eight years. The equipment will then be sold for salvage value of $500,000 at the end of year eight in the amount. The equipment will depreciate on a MACRS 7-year schedule. As this is a relatively safe investment, the required rate of return for this project is 8%, and annual sales for each year are projected at $20 million. It is also important to note that before this project, the cost of sales was 60%. Additionally, the marginal corporate tax rate is presumed to be 25%.