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FIN 320 Project Two Financial Assumptions When a business needs to invest, it’s important to look at financial options. This is true for simple purchases, such as a new piece of equipment. And it is true for complex purchases, such as a new business. Business leaders must estimate cash flows from an investment and use the net present value (NPV) method to figure out if the investment is worthwhile. Financial Option 1: Purchase a $10 Million Building
Rationale for investment: The business is considering environmental, social, and corporate governance (ESG) factors as part of its investment in a new building for its headquarters. The building itself will be a Leadership in Energy and Environmental Design (LEED)-certified building. However, the new site currently has a large, inactive gas station that sold both gasoline and diesel fuel. The new site also has a large repair facility that was used for deliveries and tractor-trailer trucks for more than 50 years. Some restoration was performed on the site, but the previous owner ran out of funds before they could bring the site up to LEED standards. Four large fuel tanks remain on the site, and they will also need to be addressed per LEED standards. Assumptions to consider:
• $10 million cash purchase
• Building generates additional net profits after tax of $1.25 million per year
• 20 year expected useful life of building
• Salvage value: $1.5 million
• Discount rate is 10%
Financial Option 2: Lease of $25 Million in Equipment
Rationale for investment: The business’s current equipment is efficient, but it uses a lot of electricity. The production line also creates significant waste material, including waste plastics. The business is looking into leasing newer, more environmentally friendly equipment that will still allow it to be at least as efficient in production as it is now. Assumptions to consider:
• Annual cash flows generated with equipment: $4 million
• Discount rate is 12%
• 15-year useful life
• No salvage value
Financial Option 3: $30 Million Investment in Bonds
Rationale for investment: The business is offering these bonds for sale contracts with another business in China to assemble computer parts. The Chinese business has used child labor in the past, but it claims it has stopped this practice. However, the U.S. business selling these bonds has not investigated to verify whether these claims are true.
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Assumptions to consider:
• 10-year bond
• 8% coupon
• Priced at a discount: $95
• Discount rate is 9%
