Assignment 2: Capital Budgeting
Due Week 9 and worth 240 points
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Futronics Inc. is a $2 billion firm that sells communications services. Founded in 1937, Futronics has provided consumer products, as well as government systems and services, for well over half a century. Due to a sharp increase in competition, flattened sales, and external economic conditions, Futronics is implementing a corporate overhead reduction program. The proposal is to replace the company’s central office stores with outside vendors. The investment will cost $1,000,000 and yield incremental cash flows of $450,000 in year one (1), $350,000 in year two (2), $300,000 in year three (3), and $250,000 in year four (4). There is no salvage value of the asset, and the firm has a cost of capital of 8%.
Write a two to three (2-3) page paper in which you:
- Calculate the net present value, internal rate of return, and simple payback. Next, determine the effect that each of the three (3) values will have on the company.
- Explain one to two (1-2) investment gains that the company could achieve by outsourcing the central office functions. Focus on the company’s potential to reduce overhead and still maintain or even improve the quality of its products.
- Discuss one (1) capital budgeting method that would be most effective for the company. Next, discuss one (1) capital budgeting method that would have the least value for the company as compared to others. Provide a rationale for your response.
- Use at least one (1) quality reference. Note: Wikipedia and similar Websites do not qualify as academic resources.
Your assignment must follow these formatting requirements:
- Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
- Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
- Describe the characteristics and valuation of stocks and bonds, and how each is a key component in the financing of corporations.
- Describe the risk versus return trade-off and identify the techniques used to measure risk.
- Explain the capital budgeting process, how project cash flow is determined and valued, and how project risk influences decision making.
- Use technology and information resources to research issues in finance.
- Write clearly and concisely about finance using proper writing mechanics.