You are an employee in the Financial Department of a medium-sized company of your choice. The company must determine the feasibility of the company making an investment in a new product line overseas or keeping it in the US. Propose the methods or techniques used to make proper capital budgeting decisions.
apply AI tools to research a company for a product line. In a minimum of 675 content words:
Describe the product.
Identify 3 qualitative and 3 quantitative factors to consider and justify why you included each in analyzing the scenario presented.
Evaluate the similarities and differences between investing in the US and in a foreign country and include a discussion on free trade.
Determine the various financial, operational, and strategic factors needed to support a recommendation for or against company expansion.
Sample Answer
As an employee in the Financial Department, my immediate task is to propose the capital budgeting methods necessary to determine the financial feasibility of investing in a new product line, weighing the option of manufacturing it in the US versus expanding operations overseas.
Capital Budgeting Methods for Investment Decisions
The core methods used to make proper capital budgeting decisions, especially for large, long-term, and complex international projects, are the Discounted Cash Flow (DCF) techniques. These techniques account for the time value of money and risk, which is critical when comparing projects with differing cash flow patterns, lifespans, and risk profiles (US vs. foreign).
Net Present Value (NPV): This is the primary method and calculates the present value of all expected future cash flows, less the initial investment. A positive NPV indicates the project is expected to add value to the company (i.e., the return exceeds the cost of capital). For international projects, the cash flows must be estimated in the foreign currency, converted to USD using expected exchange rates, and then discounted using a risk-adjusted discount rate (Cost of Capital).
Internal Rate of Return (IRR): This calculates the discount rate at which the project's NPV equals zero. The investment is accepted if the IRR exceeds the company's cost of capital (or the project's risk-adjusted required return).
Profitability Index (PI): This is the ratio of the present value of future cash flows to the initial investment. A PI greater than 1.0 means the project is acceptable. It is useful for ranking projects when capital is constrained.
For this analysis, we would calculate the NPV for both the domestic (US) and the foreign expansion scenarios, using a higher, risk-adjusted discount rate for the overseas option to reflect increased political and exchange rate risks.