Atlas Metal Company
ATLAS METAL COMPANY CASE
Executive Summary
The purpose of this report is to help a financial special assistant, Linda, to analyze the financial position of Atlas Metals Company and deciding its capital budgeting and capital structure. Firstly, I explain why firm should use Net Present Value (NPV) methods for capital budgeting rather than Return on Investment (ROI) method and Payback Period method. Secondly, I calculate the Weighted Average Cost of Capital (WACC) which will be used as discount rate while calculating NPV. Then, I decide which rapid prototyping system company should invest as well as I compare the each expansion projects’ IRR with WACC to decide which projects should be invested and which should not. After deciding projects which should be accepted, I draw Investment Opportunity Schedule (IOS) and Marginal Cost of Capital (MCC) graphs to decide where the company should finance accepted projects.
Why Should Atlas Metal Company Use NPV?
Atlas Metal Company use payback period and ROI for evaluating projects. Both of these methods have some drawbacks which lead to manager to give wrong decision. Firstly, the firm use payback period by simply calculating the average time when project’s cash flow exceeds the initial investment cost. This method ignores the cash flow after the payback period. In other words, there may be some negative cash flow after payback period which may incur extra costs to company. Moreover, it also ignores the time value of money which causes a miscalculation of expected future cash flows. Secondly, increasing the ROI and deciding projects according to only ROI might harm company in the long-run. If a company always accepts higher ROI projects, company’s average return will also increase which also lead higher risk. Furthermore, there is a time difference between incurring the initial cost for project and later future cash flow. Therefore, this is difficult to evaluate the project with its cost and return in the same time. Also,
Executive Summary
The purpose of this report is to help a financial special assistant, Linda, to analyze the financial position of Atlas Metals Company and deciding its capital budgeting and capital structure. Firstly, I explain why firm should use Net Present Value (NPV) methods for capital budgeting rather than Return on Investment (ROI) method and Payback Period method. Secondly, I calculate the Weighted Average Cost of Capital (WACC) which will be used as discount rate while calculating NPV. Then, I decide which rapid prototyping system company should invest as well as I compare the each expansion projects’ IRR with WACC to decide which projects should be invested and which should not. After deciding projects which should be accepted, I draw Investment Opportunity Schedule (IOS) and Marginal Cost of Capital (MCC) graphs to decide where the company should finance accepted projects.
Why Should Atlas Metal Company Use NPV?
Atlas Metal Company use payback period and ROI for evaluating projects. Both of these methods have some drawbacks which lead to manager to give wrong decision. Firstly, the firm use payback period by simply calculating the average time when project’s cash flow exceeds the initial investment cost. This method ignores the cash flow after the payback period. In other words, there may be some negative cash flow after payback period which may incur extra costs to company. Moreover, it also ignores the time value of money which causes a miscalculation of expected future cash flows. Secondly, increasing the ROI and deciding projects according to only ROI might harm company in the long-run. If a company always accepts higher ROI projects, company’s average return will also increase which also lead higher risk. Furthermore, there is a time difference between incurring the initial cost for project and later future cash flow. Therefore, this is difficult to evaluate the project with its cost and return in the same time. Also,