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Finance Capital Budgeting Memo

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| Finance 390 |
Memo
To: | Bob Saunders and Maria Gonzalez | From: | Kelly Moeller | cc: | Antar Salim | Date: | April 13, 2015 | Re: | Capital Budgeting | | |
After reviewing your case, it appears that you are trying to determine whether Project A or Project B would be more feasible. Project A has an investment of about $2,000,000 on plant, equipment and supplies. During the first year of operations, the sales and cash flows will be low because you plan to sell the product at a cheap price. However, once you have established your product, you plan to raise the price of the chips.
Project B is different because you are planning to sell your innovated chips to an established chip maker. The investment for this project is estimated at $2,000,000, but taking into account the sale of the patent for $200,000, the net investment will be $1,800,000. You are planning on a sizable profit the first year, but thereafter, the advancing technology will decrease the demand and decrease the profits.
With the help of capital budgeting techniques, I am confident that we can help you decide which project would be the most beneficial over the five years. It appears that you plan to use a required rate of return of 15% for both projects and would ideally like to see a payback period of less than 3.5 years and a discounted payback period of less than 4 years.
Capital budgeting deals with the investments in fixed assets, estimate expenditure, outflows and long term gains, and helps evaluate the adequacy of returns. First you must analyze the worth of each project and its return for the future. Some techniques that can be used to evaluate the project include, simple payback period, discounted payback period, net present value, internal rate or return, profitability index, and modified internal rate of return.
I have ranked the projects based on the following…...

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