To: Ford Allen
Date: [ 2/22/2012 ]
Re: Recommendation for Amstelveen Corporation’s project investment
The purpose of this memo is to explain and recommend which projects Amstelveen Corporation should invest in based on capital budgeting calculations. First, I will explain if there are any contradictory recommendations and then I will give the recommended total I suggest Amstelveen to raise. I will also give my recommendation on which project(s) the company should pursue if it remains limited to €8,000.000.
Recommendation of Inadvisable Investments
I began my process of identifying which projects would be inadvisable to pursue based on company policies by first calculation the net present value, internal rate of return, accounting rate of return, and the payback period for each project. Capital Budgeting Figures (in € thousands) | | | Project A | Project B | Project C | Project D | Project E | Project F | Project G | Net Present Value | $5,371.90 | $1,044.90 | $5,464.00 | $114.60 | $6,480.00 | ($1,727.00) | ($304.95) | Internal Rate of Return | 92% | 34% | 28% | 3% | 47% | 0% | 0% | Accounting Rate of Return | 144% | 15% | 21.25% | 45.33% | 36% | 0% | 0% | Payback | 1.5 years | 1.5 years | 2.5 years | 1.2 years | 2 years | 5 years | 3 years |
Based on Amstelveen Corporations’ company policies, the capital budget figures, and no capital constraints I would not suggest pursuing in Project F or Project G. Both of these projects have a negative net present value which will decrease the value of the company since there are negative cash flows. Also, on both of these projects the internal rate of return is below the 7% cost of capital. When the internal rate of return is below the cost of capital, the project should be rejected. Another item to consider in decided to accept or reject the project is the payback period. Amstelveen uses a payback period cut-off of 2 years. With this