Workbook3.xls - Excellence in Financial Management - … files/Workbook3.xls · XLS file · Web view2017-06-16 · Answer Report 1 Summary Project F Project E Project D Project C

Capital Budgeting Analysis forMedical Services USA

Purpose of Spreadsheet

Illustrate concepts related to capital budgeting analysis of projects. Certain aspects of a capitalproject may have not been included in order to help highlight basic concepts, such asNet Present Value. The spreadsheet is setup to evaluate six different projects and summarizeall projects based on both economic analysis and risk factors assigned.Note: The Solver feature of Excel is used in an example at the end. Please make sure that youhave installed Solver: Solver add-on feature (Tools => Add-Ins => Solver).

Economic Analysis

Three economic criteria are applied to projects: Net Present Value, Modified Internal Rate ofReturn and Discounted Payback Period. If your project(s) have non-periodic payments(payments are not equal over the life of the project), then you should use these Excel Functions:=XNPV for Net Present Value by entering specific dates of cash flows=XIRR for Internal Rate of Return by entering specific dates of cash flows

Cell Indicators

Certain cells are highlighted as follows:

Selected input cells (not all input cells are highlighted since each project is unique)Cell includes a comment - move mouse and point over cell for commentIndication of an error in calculation or a red flag that a criteria has not been met

Organization of Spreadsheet

General InputThe following general inputs have been used on different worksheets:

A Diesel Generation System <= Enter project nameB New Clinic in Kansas City <= Enter project nameC Upgrade to DuBois Center <= Enter project nameD Southeastern Upgrades <= Enter project nameE Canadian Partnership <= Enter project nameF Regulatory Compliance NE <= Enter project name

27.50% <= Marginal Tax Rate *

Supplemental Material for Short Course 3: Capital Budgeting Analysis, located on the internet at www.exinfm.com/training. Prepared by: Matt H. Evans, CPA, CMA, CFM

Lead WorksheetProject A Analysis - Example with Annual Cash Flow CalculationsProject B Analysis - Example with Sunk Costs & Projected FinancialsProject C Analysis - Example of Upgrade InvestmentProject D Analysis - Example of Project FinancingProject E Analysis - Example of Foreign InvestmentProject F Analysis - Example of Monthly Inflows / OutflowsSummary and Example of Using Excel SolverAnswer Report 1 - Output from Using Excel Solver in Summary Example

B26

Cells with a red triangle in the upper right corner have comments

9.50% <= Weighted Average Cost of Capital$10,000 <= Threshold investment amount where formal project analysis

is not required - general expenditure item.

* If you expect changes in future tax rates, you may want to consider these changes in your analysis.

Project Codes (Used to help categorize various capital projects)

Project Classification Codes:1 Land2 Buildings3 Leasehold Improvement4 Equipment5 Furniture and Fixtures6 Vehicles7 Acquisitions8 Investments9 Other

Primary Justification for Project: A Cost Reduction

B ReplacementC Expansion / AdditionD Service ImprovementE Safety & ComplianceF Operating NecessityG Other

Priority Code:1 Carry over project, already in progress, requires additional funding2 Essential for continued operations, regulatory compliance, etc.3 Economically desired for revenue growth, cost reductions, etc.4 General improvement for building or expanding the business

E52

Projects that have an initial investment of less than $ 10,000 do not require formal analysis. Submit as a general budget request item.

Supplemental Material for Short Course 3: Capital Budgeting Analysis, located on the internet at www.exinfm.com/training. Prepared by: Matt H. Evans, CPA, CMA, CFM

Lead WksProject AProject BProject CProject DProject EProject FSummary

<= Threshold investment amount where formal project analysis


A Diesel Generation System

Project Information

Project Description > New diesel backup system for high volume medical plantProject Benefits > Eliminate downtime, improve efficiency, better serviceProject Location > Mobile, ALResponsible Division > SouthernResponsible Department > Plant EngineeringContact Person Name > John Pearson, Southern Div ManagerEstimated Project Start Date > 01/01/92Classification > 4 Justification > F Priority > 2

Preliminary Review

Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the attribute does not apply to the project. 5 is the highest rating, indicating that the project strongly meets this project attribute.

Financial Attributes:F1 Project improves overall profitability of the company 2 F2 Project lowers cost structure 3 F3 Project will generate a rate of return 3 F4 Project improves asset utilization 1 F5 Other Financial Attribute __________________________________ 0 F6 Other Financial Attribute __________________________________ 0

Operating Attributes:O1 Improves operating efficiencies 4 O2 Increases the customer base 0 O3 Improves overall customer service 0 O4 Improves competitive position of company 0 O5 Other Operating Attribute _________________________________ 0 O6 Other Operating Attribute _________________________________ 0

Contingency Attributes:C1 Project has options that allow for change during life 2 C2 Project will positively impact company even if value is negative 4 C3 Project can be abandoned easily with some positive value 1 C4 Project permits several options to maximize value 2 C5 Other Cont Attribute _____________________________________ 0

Miscellaneous Attributes:M1 Expands Human Resource Capital 0 M2 Enhances workforce productivity 0

M3 Project meets a critical regulatory, security or specific need 0 M4 Project fits with company strategy and goals 1 M5 Probability of project success is very high / low risk 4 M6 Other Misc Attribute _____________________________________ 0 M7 Other Misc Attribute _____________________________________ 0 M8 Other Misc Attribute _____________________________________ 0

Total Preliminary Points 27

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceedwith analysis and submission.

Financial Analysis

Proposed Project Expenditure:* Equipment & Facilities (purchase price) 165,000 * Installation Cost 650 * Labor 4,500 * Materials 250 * Shipping 1,280 * Taxes 11,550

Other Costs (expensed) 350 Intial Cash Outlay for Project 183,580 Tax Breaks for Investment (1,500)Sale of Existing Assets 0 Tax Benefit on Loss - Sale of Assets 0 Total Project Investment 182,080 Project Analysis Required? Yes

* capitalized costs subject to depreciation using double declining method over 8 years with $ 8,000 salvage valueNOTE: Depreciation for tax purposes is considered the same for accounting purposes. If tax depreciation isdifferent than accounting depreciation, deduct tax depreciation in calculating taxes.

Cash Flows associated with Project:Year 1:Reductions in annual operating costs 28,900 New revenues from higher output volumes 6,200 Eliminate third party vendor service 35,000 Annual service and maintenance (4,600)Annual fuel costs (1,500)Depreciation:

Cost 183,230 Salvage Value 8,000 Useful Life 8 Depreciation in Yr 1 (45,808)

Operating Cash Flow in Year 1 18,193 Less Taxes (5,003)Net Income - Year 1 13,190

C68

Quote from vendor selected in bidding process.

C70

In house personnel to assist with installation and testing during first week.

C71

Initially, purchase of diesel fuel for storage and testing.

C76

Not recovered until three months after project is complete.

Add Back Non Cash Depreciation 45,808 Change to Net Working Capital (3,500)Net Cash Flow - Year 1 55,497

Year 2:Reductions in annual operating costs 32,100 New revenues from higher output volumes 6,900 Eliminate third party vendor service 35,000 Annual service and maintenance (5,000)Annual fuel costs (1,800)Depreciation:


Operating Cash Flow in Year 2 32,844 Less Taxes (9,032)Net Income - Year 2 23,812 Add Back Non Cash Depreciation 34,356 Change to Net Working Capital (650)Net Cash Flow - Year 2 57,518

Year 3:Reductions in annual operating costs 34,800 New revenues from higher output volumes 7,100 Eliminate third party vendor service 35,000 Annual service and maintenance (5,000)Annual fuel costs (2,000)Depreciation:



Year 4:Reductions in annual operating costs 37,200 New revenues from higher output volumes 7,900 Eliminate third party vendor service 0 Annual service and maintenance (5,200)Annual fuel costs (2,100)Depreciation:










Cost 183,230

Salvage Value 8,000 Useful Life 8 Depreciation in Yr 7 (8,153)


Year 8:Reductions in annual operating costs 55,500 New revenues from higher output volumes 11,000 Rebuild / Repair Unit Option (25,000)Annual service and maintenance (4,600)Annual fuel costs (2,600)Depreciation:



Terminal Year 9Salvage Value of Asset 5,000 Working Capital Reversed 2,500

Terminal Value 7,500

At the end of Year 8, a decision will be made to either rebuild the asset or outsource to third party.

Economic Analysis

Summarize Cash Outflows and Inflows for Project:Cash Present Recovery

Year Flows Value Payback0 (182,080) (182,080)1 55,497 49,997 (132,083) 2 57,518 46,683 (85,400) 3 57,213 41,834 (43,566) 4 32,469 21,389 (22,177) 5 34,303 20,357 (1,820)6 36,334 19,426 17,606 <= payback7 40,082 19,306 36,912 8 26,499 11,499 48,410 9 7,500 2,932 51,342

Net Present Value 51,342

Required Rate of Return for Project => 11.00%Reinvestment Rate for Project => 6.00% Net Present Value $51,342 Modified IRR 11.03%Discounted Payback (years) 6.1

Economic Assessment

Project has positive Net Present Value? YesProject has IRR in excess of cost? YesProject has a positive payback? Yes

Project must meet at least two of the three Economic Criteria, otherwise specialapproval is required.

Risk Analysis

Risk Premium Applied to Project 1.50%

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:Risk Ranking = 1 for lowest possible risk up to 10 for highest possible risk

Probability of Accurate and Reliable Information - Gov't T Bond 1.00 (a)Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10) 1 (b)Exponential power to apply to Risk Ranking is 2 - (a) 1 (c)Risk Factor = (b) raised to the power (c) 1

Probability of Accurate and Reliable Information for Project 0.6Risk Ranking assigned to project (1 to 10) 5 Exponential power to apply to Project 1.4Risk Factor for Project 10

Assign probabilities to three possible outcomes for project:P Pesimistic outlook, declining growth, slower volumes, etc. 25.00%N Normal expected outlook as applied in analysis 60.00%O Optomistic outlook, better than expected growth 15.00%

Total should equal 100.00% 100.00%

Enter Expected Cash Flows for different outcomes:

Standard Coeff ofNet Cash Flows Expected Deviation Variation

Year Pesimist Normal Optomist Value (Abs Risk) (Rel Risk)1 41,800 55,497 64,900 53,483 17,758 0.332 2 39,750 57,518 67,300 54,543 21,584 0.396 3 37,400 57,213 66,100 53,593 22,854 0.426 4 26,200 32,469 41,050 32,189 10,699 0.332 5 21,050 34,303 40,900 31,979 15,679 0.490

C279

There are usually very few unknowns concerning a Government Treasury Bond; yields, payments, and other attributes are usually very certain and thus, the probability of reliable information is extremely high for such an investment.

6 13,200 36,334 39,800 31,071 22,531 0.725 7 11,800 40,082 40,800 33,119 25,430 0.768 8 8,100 26,499 35,700 23,279 21,793 0.936

Terminal 1,000 7,500 8,500 6,025 6,346 1.053 Totals 200,300 347,416 405,050 319,282 164,674 0.516

Absolute Risk of Project (Std Deviation) 164,674 Relative Risk of Project (Coeff of Variation) 0.516

Revised Economic Analysis using Expected Values

Expected Present RecoveryYear Value Value Payback

0 (182,080) (182,080)1 53,483 48,183 (133,897)2 54,543 44,268 (89,628)3 53,593 39,187 (50,442)4 32,189 21,204 (29,238)5 31,979 18,978 (10,259)6 31,071 16,612 6,352 payback7 33,119 15,952 22,304 8 23,279 10,102 32,406 9 6,025 2,355 34,761

Totals 34,761

Net Present Value $34,761 Modified IRR 10.07%Discounted Payback (years) 6.6

capitalized costs subject to depreciation using double declining method over 8 years with $ 8,000 salvage valueNOTE: Depreciation for tax purposes is considered the same for accounting purposes. If tax depreciation isdifferent than accounting depreciation, deduct tax depreciation in calculating taxes.

At the end of Year 8, a decision will be made to either rebuild the asset or outsource to third party.


B New Clinic in Kansas City

Project Information

Project Description > New Walk In Clinic - Kansas CityProject Benefits > Toehold market position, profit center, business expansionProject Location > Kansas CityResponsible Division > Mid WestResponsible Department > Business DevelopmentContact Person Name > Bill Watson, Operations DirectorEstimated Project Start Date > 04/01/92Classification > 2 Justification > CPriority > 3

Preliminary Review


Financial Attributes:F1 Project improves overall profitability of the companyF2 Project lowers cost structureF3 Project will generate a rate of returnF4 Project improves asset utilizationF5 Other Financial Attribute __________________________________F6 Other Financial Attribute __________________________________

Operating Attributes:O1 Improves operating efficienciesO2 Increases the customer baseO3 Improves overall customer serviceO4 Improves competitive position of companyO5 Other Operating Attribute _________________________________O6 Other Operating Attribute _________________________________

Contingency Attributes:C1 Project has options that allow for change during lifeC2 Project will positively impact company even if value is negativeC3 Project can be abandoned easily with some positive valueC4 Project permits several options to maximize valueC5 Other Cont Attribute _____________________________________

Miscellaneous Attributes:M1 Expands Human Resource CapitalM2 Enhances workforce productivityM3 Project meets a critical regulatory, security or specific needM4 Project fits with company strategy and goalsM5 Probability of project success is very high / low riskM6 Other Misc Attribute _____________________________________

M7 Other Misc Attribute _____________________________________M8 Other Misc Attribute _____________________________________

Total Preliminary Points


Financial Analysis

Proposed Project Expenditure: Rework / Upgrade Existing Building 85,000 (1)

Equipment and Fabrication 45,000 (2)Marketing and Promotion of Clinic 7,500 Contingency Costs 3,500 Market Study / Research 2,500 <= exclude since sunk cost, not relevant

Total Project Investment 141,000 Project Analysis Required? Yes

(1): Depreciated over 30 years using the straight line method with no salvage value.(2): Depreciated over 12 years using the declining balance method with no salvage value.Tax depreciation and accounting depreciation are considered the same.

Working Capital Requirements:Historical analysis of other similar clinics indicates that clinics require:

Cash 3,500 Accounts Receivable 7,500 Inventories 5,000

Total Current Assets 16,000 Accounts Payable 6,000 Other accruals 4,000

Total Current Liab 10,000 Net Working Capital 6,000 Sales Revenues 60,000 Ratio (NWC / Sales) 10.00%

The above Ratio will be applied to estimate working capital requirements

Opportunity Cost Analysis:

As a result of this project investment, the company expects some negative impact to itsTopeka, Kansas facility as follows:

Year 1 Year 2Reduction to Sales Revenues (4,000) (5,000)Reductions in overall cost 1,500 2,000 Net Reduction to Income (2,500) (3,000)

Five Year Financial Forecast:Year Year

1 2Sales Revenues 65,000 75,000

C70

A contingency provision for unexpected costs is added into the investment estimate.

C71

A market study was conducted to ascertain if a new clinic would be profitable in Kansas City. The study is made regardless of the investment decision and therefore, it is not a relevant cost associated with the investment; it is sunk regardless if the project goes ahead or not.

D91

Ratio of Net Working Capital to Sales.

Cost of Services:Personnel / Labor (15,000) (18,000)Supplies, Vendors, etc. (8,000) (10,000)Adm Overhead Increases (22,000) (28,000)

Opportunity Cost (per above) (2,500) (3,000)Profit before Tax 17,500 16,000 Taxes (4,813) (4,400)Investment Credits 50 0 Net Profit 12,738 11,600 Depreciation:

Upgrade to BuildingUseful Life => 30 2,833 2,833

Equipment 12 6,923 6,346

Operating Cash Flow 22,494 20,779 Net Working Capital (6,500) (7,500)Planned Critical Cash Outlays (1,500) (2,500)

Total Cash Flow 14,494 10,779

Economic Analysis

Summarize Cash Outflows and Inflows for Project:

Cash Present Year Flows Value Payback

0 (141,000) (141,000)1 14,494 12,883 (128,117)2 10,779 8,517 (119,599)3 17,723 12,447 (107,152)4 30,696 19,163 (87,989)5 30,634 17,000 (70,990)6 34,197 16,868 (54,121)7 33,845 14,840 (39,282)8 35,043 13,658 (25,624)9 36,604 12,681 (12,943)

10 36,914 11,368 (1,575)11 31,450 8,609 7,033 payback12 31,450 7,652 14,686 13 31,450 6,802 21,488 14 31,450 6,046 27,534 15 31,450 5,374 32,908 16 31,450 4,777 37,686 17 31,450 4,246 41,932 18 31,450 3,775 45,707 19 31,450 3,355 49,062 20 31,450 2,982 52,044


Required Rate of Return for Project => 12.50%Reinvestment Rate for Project => 7.50%


Economic Assessment

Project has positive Net Present Value? YesProject has IRR in excess of cost? NoProject has a positive payback? Yes


Risk Analysis



Probability of Accurate and Reliable Information - Gov't T BondRisk Ranking assigned to Gov't Treasury Bond ( 1 to 10)Exponential power to apply to Risk Ranking is 2 - (a)Risk Factor = (b) raised to the power (c)

Probability of Accurate and Reliable Information for ProjectRisk Ranking assigned to project (1 to 10)Exponential power to apply to ProjectRisk Factor for Project

Assign probabilities to three possible outcomes for project:P Pesimistic outlook, declining growth, slower volumes, etc.N Normal expected outlook as applied in analysisO Optomistic outlook, better than expected growth

Total should equal 100.00%


StandardNet Cash Flows Expected Deviation

Year Pesimist Normal Optomist Value (Abs Risk)1 8,650 14,494 26,800 13,064 13,845 2 6,800 10,779 27,500 10,223 15,031 3 7,900 17,723 33,200 15,059 19,774 4 8,600 30,696 37,800 23,317 25,865 5 8,100 30,634 43,900 23,410 30,422 6 7,500 34,197 42,100 25,248 30,794 7 7,100 33,845 41,850 24,884 30,908 8 6,200 35,043 40,950 25,243 31,501 9 6,000 36,604 40,200 26,072 31,630

10 5,500 36,914 39,900 26,068 31,993 11 5,100 31,450 37,750 22,543 29,386 12 4,900 31,450 35,950 22,383 28,367 13 4,250 31,450 34,150 22,065 27,779 14 3,705 31,450 32,990 21,816 27,520 15 3,250 31,450 31,650 21,590 27,054

D180


16 2,680 31,450 31,280 21,372 27,349 17 2,005 31,450 31,000 21,122 27,806 18 1,490 31,450 30,850 20,934 28,197 19 1,105 31,450 29,990 20,756 27,986 20 790 31,450 28,750 20,584 27,454

Totals 101,625 595,428 698,560 427,753 540,660



Expected Present RecoveryYear Values Value Payback

0 (141,000) (141,000)1 13,064 11,612 (129,388)2 10,223 8,077 (121,311)3 15,059 10,576 (110,734)4 23,317 14,557 (96,177)5 23,410 12,991 (83,186)6 25,248 12,454 (70,732)7 24,884 10,911 (59,821)8 25,243 9,838 (49,983)9 26,072 9,032 (40,951)

10 26,068 8,028 (32,923)11 22,543 6,171 (26,752)12 22,383 5,446 (21,306)13 22,065 4,772 (16,534)14 21,816 4,194 (12,340)15 21,590 3,689 (8,651)16 21,372 3,246 (5,404)17 21,122 2,852 (2,552) 18 20,934 2,513 (40)19 20,756 2,214 2,175 payback20 20,584 1,952 4,127



Assign points from 0 to 5 for each of the following project attributes. 0 indicates that the

3 2 4 2 0 0

2 3 3 2 0 0

0 0 0 0 0

0 0 0 3 0 0

0 0

24

Projects with point totals less than 15 may represent poor investments and require additionalapproval before further analysis and processing. Projects with point totals between 15 and 20require caution and careful analysis. Projects with point totals greater than 20 may proceed

<= exclude since sunk cost, not relevant

(1): Depreciated over 30 years using the straight line method with no salvage value.(2): Depreciated over 12 years using the declining balance method with no salvage value.

As a result of this project investment, the company expects some negative impact to its

Year 3 Year 4 Year 5(3,000) (1,500) (500)1,200 700 100

(1,800) (800) (400)

TerminalYear Year Year Year Year Year Year Year Flow

3 4 5 6 7 8 9 10 11 to 20100,000 125,000 135,000 140,000 145,000 149,000 153,000 155,000 160,000

(22,000) (25,000) (30,000) (32,000) (35,000) (36,000) (36,500) (37,000) (40,000)(15,000) (18,000) (19,000) (15,000) (15,000) (15,000) (15,000) (15,000) (18,000)(30,000) (32,000) (35,000) (36,000) (37,000) (37,000) (37,000) (37,000) (40,000)(1,800) (800) (400) 0 0 0 0 0 0 31,200 49,200 50,600 57,000 58,000 61,000 64,500 66,000 62,000 (8,580) (13,530) (13,915) (15,675) (15,950) (16,775) (17,738) (18,150) (17,050)

0 0 0 0 0 0 0 0 0 22,620 35,670 36,685 41,325 42,050 44,225 46,763 47,850 44,950

2,833 2,833 2,833 2,833 2,833 2,833 2,833 2,833 2,500

5,769 5,192 4,615 4,038 3,462 2,885 2,308 1,731 0 31,223 43,696 44,134 48,197 48,345 49,943 51,904 52,414 47,450

(10,000) (12,500) (13,500) (14,000) (14,500) (14,900) (15,300) (15,500) (16,000)(3,500) (500) 0 0 0 0 0 0 0 17,723 30,696 30,634 34,197 33,845 35,043 36,604 36,914 31,450

Project must meet at least two of the three Economic Criteria, otherwise special

Compare Risk Factor with Government Treasury Bond (lowest risk) to Project Risk Factor:

1.00 (a)1 (b)1 (c)1

0.57

1.5 19

35.00%60.00%

5.00%100.00%

Coeff ofVariation(Rel Risk)

1.060 1.470 1.313 1.109 1.300 1.220 1.242 1.248 1.213 1.227 1.304 1.267 1.259 1.261 1.253

1.280 1.316 1.347 1.348 1.334 1.264


C Upgrade to DuBois Center

Project Information

Project Description > Upgrade DuBois for unused capacityProject Benefits > Better use of facility, more incomeProject Location > IowaResponsible Division > Mid WestResponsible Department > FinanceContact Person Name > Cheryl Strickland, ControllerEstimated Project Start Date > 03/15/92Classification > 4 Justification > CPriority > 3

Preliminary Review





Miscellaneous Attributes:M1 Expands Human Resource CapitalM2 Enhances workforce productivityM3 Project meets a critical regulatory, security or specific needM4 Project fits with company strategy and goalsM5 Probability of project success is very high / low riskM6 Other Misc Attribute _____________________________________

M7 Other Misc Attribute _____________________________________M8 Other Misc Attribute _____________________________________



Cost Volume Profile of DuBois Facility

Personnel & Labor 37.50Supplies and Inventory 2.65Variable Adm Overhead 3.60Fixed Overhead Costs 10.50Total Unit Costs per Billable Hour 54.25

Current Operating Capacity => 60%Maximum Capacity per month 15,000 billable hoursSales growth rates over the next ten years are estimated at 4% per year with increases to costs estimated at 1.5% per year for each variable component.

Estimated Changes from Upgrade Investment

Upgrade Investment will result in additional 5,000 billable hours per monthNew Services from Upgrade Investment are billable to customers at $ 50.00 per hourCapacity after upgrade => 14,000Does upgrade project exceed max? No

Financial Analysis

Proposed Project Expenditure:Upgrade Systems & Facilities 1,150,000Executive Management Time 405,000Training and Promotion 135,000Contingency Costs 90,000

Total Investment 1,780,000Project Analysis Required? Yes

Annual < - - relevant annual costs to project - - >Incremental Personnel Supplies Var Adm Profits

Year Revenues & Labor & Inventory Overhead before Tax1 3,000,000 (2,250,000) (159,000) (216,000) 375,000 2 3,090,000 (2,283,750) (161,385) (219,240) 425,625 3 3,182,700 (2,318,006) (163,806) (222,529) 478,359 4 3,278,181 (2,352,776) (166,263) (225,867) 533,275 5 3,376,526 (2,388,068) (168,757) (229,255) 590,447 6 3,477,822 (2,423,889) (171,288) (232,693) 649,952 7 3,582,157 (2,460,247) (173,857) (236,184) 711,868 8 3,689,622 (2,497,151) (176,465) (239,727) 776,279 9 3,800,310 (2,534,608) (179,112) (243,322) 843,267

10 3,914,320 (2,572,627) (181,799) (246,972) 912,921

C87

Modifications to technical equipment and processes to expand and introduce new services to existing customer base. These costs are not considered capitalized related expenditures.

C88

Senior Management from other locations will temporarily oversee upgrade project for successful implementation.

Due to the rapid changes in services provided by this upgrade investment project, no terminal value was calculated for the periods beyond year 10.

Economic Analysis

Summarize Cash Outflows and Inflows for Project:Cash Present

Year Flows Value Payback 0 (1,780,000) (1,780,000) 1 256,875 233,523 (1,546,477) 2 295,578 244,279 (1,302,198) 3 334,811 251,548 (1,050,650) 4 374,625 255,874 (794,776) 5 416,074 258,349 (536,427) 6 459,215 259,215 (277,212) 7 504,105 258,685 (18,527)

8 550,802 256,953 238,427 payback9 599,369 254,191 492,618

10 649,868 250,552 743,170 Net Present Value 743,170



Economic Assessment



Risk Analysis





D152







10 615,100 649,868 677,700 647,089 46,230 4,014,100 4,441,320 4,722,350 4,398,031 531,419




0 (1,780,000) (1,780,000)1 252,324 229,385 (1,550,615)2 289,271 239,067 (1,311,548)3 332,174 249,568 (1,061,981)4 369,026 252,050 (809,931)5 410,823 255,089 (554,842)6 453,405 255,935 (298,907)7 500,013 256,586 (42,321)8 547,391 255,362 213,041 payback9 596,515 252,980 466,021



3 3 4 4 0 0

4 3 3 2 0 0

0 0 0 0 0

0 0 0 2 3 0

0 0

31

1.031.015

Less Project Adj to CashTaxes Income Income Flow(103,125) 271,875 (15,000) 256,875 (117,047) 308,578 (13,000) 295,578 (131,549) 346,811 (12,000) 334,811 (146,651) 386,625 (12,000) 374,625 (162,373) 428,074 (12,000) 416,074 (178,737) 471,215 (12,000) 459,215 (195,764) 516,105 (12,000) 504,105 (213,477) 562,802 (12,000) 550,802 (231,898) 611,369 (12,000) 599,369 (251,053) 661,868 (12,000) 649,868

K96

The project is expected to tie up some minor amounts of working capial.

Due to the rapid changes in services provided by this upgrade investment project, no terminal value was


1.00 (a)1 (b)1 (c)1

0.74

1.3 6

20.00%65.00%15.00%

100.00%


0.218 0.215 0.135 0.153 0.130 0.121 0.106 0.097 0.086 0.071 0.121


D Southeastern Upgrades

Project Information

Project Description > Upgrade to various Southeastern facilitiesProject Benefits > Better use of facility, more incomeProject Location > AtlantaResponsible Division > SoutheastResponsible Department > EngineeringContact Person Name > Bob FerrellEstimated Project Start Date > 02/05/92Classification > 4 Justification > CPriority > 3

Preliminary Review





Miscellaneous Attributes:M1 Expands Human Resource CapitalM2 Enhances workforce productivity

M3 Project meets a critical regulatory, security or specific needM4 Project fits with company strategy and goalsM5 Probability of project success is very high / low riskM6 Other Misc Attribute _____________________________________M7 Other Misc Attribute _____________________________________M8 Other Misc Attribute _____________________________________



Project Summary

Several facilities in the Southeast area need to upgrade existing scanner equipment to better serve customersand produce higher quality analysis / treatments. The Atlanta Bank has agreed to finance $ 500,000 towardsthe investment at 9% over a five year period. The loan repayment schedule is as follows:

Interest Number of Loan Interest Principal TotalRate Installments Year Balance Payment Payment Payment

0.09 5 1 500,000 (45,000) (83,546) (128,546)2 416,454 (37,481) (91,065) (128,546)3 325,388 (29,285) (99,261) (128,546)4 226,127 (20,351) (108,195) (128,546)5 117,932 (10,614) (117,932) (128,546)

Financial Analysis

Proposed Project Expenditure:

Total Upgrade Acquisition Price 1,650,000 (1)Installation / Training / Other Costs 65,000

Total Investment 1,715,000 Financed through Bank (500,000)

Net Cash Outlay 1,215,000 Project Analysis Required? Yes

(1): $ 650,000 of this price is subject to capitalization. Depreciation deducted on the tax returndiffers from depreciation for accounting purposes: Tax Return Accounting

Year Depreciation Depreciation1 325,000 65,000 2 162,500 65,000 3 81,250 65,000 4 40,625 65,000 5 40,625 65,000 6 65,000 7 65,000 8 65,000 9 65,000

10 65,000 Total 650,000 650,000

Cash Flow Analysis #1 - Only Project Cash FlowsService Other Depreciation Taxable

Year Revenues Costs Costs Deduction Income1 535,800 (112,000) (38,000) (325,000) 60,800 2 585,900 (155,100) (46,500) (162,500) 221,800 3 612,600 (188,600) (54,100) (81,250) 288,650 4 636,050 (202,900) (63,200) (40,625) 329,325 5 644,112 (224,200) (68,900) (40,625) 310,387 6 653,500 (241,600) (72,110) 339,790 7 668,200 (258,800) (77,800) 331,600 8 677,400 (272,100) (83,100) 322,200 9 689,800 (287,800) (88,900) 313,100

10 705,300 (298,400) (94,200) 312,700 11 712,900 (309,100) (97,800) 306,000 12 719,600 (319,400) (101,050) 299,150 13 722,800 (325,400) (104,900) 292,500 14 729,100 (329,900) (107,800) 291,400 15 734,300 (334,100) (110,100) 290,100

Economic Analysis #1Present

Year Cash Flow Value Payback0 (1,215,000) (1,215,000)1 339,580 303,875 (911,125)2 290,205 232,386 (678,739)3 254,921 182,668 (496,071)4 241,486 154,846 (341,225)5 227,256 130,400 (210,825)6 207,148 106,364 (104,461)7 200,010 91,901 (12,560)8 192,395 79,107 66,547 payback9 185,098 68,104 134,651

10 184,408 60,716 195,367 11 179,050 52,754 248,120 12 173,284 45,686 293,807 13 167,963 39,627 333,434 14 166,665 35,187 368,621 15 165,223 31,214 399,835


Required Rate of Return for Project => 11.75%Reinvestment Rate for Project => 4.50% Net Present Value $399,835 Modified IRR 9.25%Discounted Payback (years) 8.16

C104

When a project is financed, we can either include the cash flows associated with financing (principal and interest) or we can exclude the financing cash flows and focus on only the project related cash flows. Since the discount rate accounts for the cost of financing, the preferred approach is to analyze only project cash flows and ignore financing flows since they are accounted for within the discount rate. If you decide to include financing cash flows, then make sure you use a discount rate that matches the cost of financing the project.

Cash Flow Analysis #2 - Include Financing Flows / Discount Rate = Cost of Borrowing: Service Other Taxable Less

Year Revenues Costs Costs Income Taxes1 535,800 (112,000) (38,000) 385,800 (106,095)2 585,900 (155,100) (46,500) 384,300 (105,683)3 612,600 (188,600) (54,100) 369,900 (101,723)4 636,050 (202,900) (63,200) 369,950 (101,736)5 644,112 (224,200) (68,900) 351,012 (96,528)6 653,500 (241,600) (72,110) 339,790 (93,442)7 668,200 (258,800) (77,800) 331,600 (91,190)8 677,400 (272,100) (83,100) 322,200 (88,605)9 689,800 (287,800) (88,900) 313,100 (86,103)

10 705,300 (298,400) (94,200) 312,700 (85,993)11 712,900 (309,100) (97,800) 306,000 (84,150)12 719,600 (319,400) (101,050) 299,150 (82,266)13 722,800 (325,400) (104,900) 292,500 (80,438)14 729,100 (329,900) (107,800) 291,400 (80,135)15 734,300 (334,100) (110,100) 290,100 (79,778)

Economic Analysis #2Present

Year Cash Flow Value Payback0 (1,215,000) (1,215,000)1 223,409 209,724 (1,005,276)2 171,966 151,544 (853,731)3 134,428 111,208 (742,523)4 118,536 92,054 (650,469)5 101,628 74,089 (576,380)6 207,148 141,766 (434,614)7 200,010 128,496 (306,118)8 192,395 116,033 (190,085)9 185,098 104,794 (85,291)

10 184,408 98,008 12,718 payback11 179,050 89,332 102,050 12 173,284 81,159 183,209 13 167,963 73,849 257,058 14 166,665 68,790 325,848 15 165,223 64,017 389,865


After Tax Cost of Borrowing => 6.53%Reinvestment Rate for Project => 2.50% Net Present Value $389,865 Modified IRR 6.38%Discounted Payback (years) 10.87

Economic Assessment (based on Analysis #1)

Project has positive Net Present Value? Yes

C152

The preferred approach to cash flow analysis for projects with financing is to exclude financing flows and evaluate only project related cash flows. This way, we can use the appropriate discount rate adjusted for risk. This is how we did it in Cash Flow Analysis #1. However, we can combine both project and financing cash flows. Additionally, instead of adjusting cash flows for interest expense, principal payments on the loan, and depreciation, we will simply use "net" tax amounts to illustrate cash flows for our project. We still come up with the same answer. Example for Year 1 using gross amounts: Revenues . . . . . $ 535,800 Serv Costs . . . . (112,000) Other Costs . . . ( 38,000) Interest Exp . . . ( 45,000) Depreciation . . . (325,000) Taxable Income 15,800 Less Taxes . . . . . ( 4,345) Net Income . . . . 11,455 Depreciation 325,000 Loan Principal ( 83,546) Working Capital ( 29,500) Cash Flow 223,409 NOTE: Don't forget to use only the financing cost rate as your discount rate when combining project and financing cash flows in your cash flow analysis.

Project has IRR in excess of cost? NoProject has a positive payback? Yes


Risk Analysis (based on analysis #1)



Probability of Accurate and Reliable Information - Gov't T Bond 1.00Risk Ranking assigned to Gov't Treasury Bond ( 1 to 10) 1Exponential power to apply to Risk Ranking is 2 - (a) 1Risk Factor = (b) raised to the power (c) 1

Probability of Accurate and Reliable Information for Project 0.65Risk Ranking assigned to project (1 to 10) 6Exponential power to apply to Project 1.35Risk Factor for Project 11

Assign probabilities to three possible outcomes for project:P Pesimistic outlook, declining growth, slower volumes, etc. 10.00%N Normal expected outlook as applied in analysis 70.00%O Optomistic outlook, better than expected growth 20.00%

Total should equal 100.00% 100.00%


Standard Coeff ofNet Cash Flows Expected Deviation Variation

Year Pesimist Normal Optomist Value (Abs Risk) (Rel Risk)1 321,100 339,580 361,200 342,056 30,106 0.088 2 271,600 290,205 311,950 292,694 30,291 0.103 3 237,200 254,921 276,705 257,506 29,762 0.116 4 224,850 241,486 261,890 243,903 27,901 0.114 5 211,800 227,256 248,605 229,980 27,951 0.122 6 190,450 207,148 227,690 209,586 28,057 0.134 7 184,100 200,010 220,280 202,473 27,325 0.135 8 176,350 192,395 211,650 194,642 26,549 0.136 9 169,150 185,098 204,880 187,459 26,935 0.144

10 168,340 184,408 203,090 186,537 26,078 0.140 11 163,100 179,050 197,450 181,135 25,763 0.142 12 158,350 173,284 192,770 175,688 26,038 0.148 13 153,300 167,963 185,200 169,944 23,958 0.141 14 152,820 166,665 183,990 168,746 23,512 0.139 15 152,650 165,223 183,690 167,659 23,671 0.141

Totals 2,935,160 3,174,689 3,471,040 3,210,006 403,897 0.126

C216





0 (1,215,000) (1,215,000)1 342,056 306,090 (908,910)2 292,694 234,379 (674,531)3 257,506 184,520 (490,011)4 243,903 156,396 (333,614)5 229,980 131,963 (201,651)6 209,586 107,616 (94,035)7 202,473 93,032 (1,002)8 194,642 80,030 79,028 payback9 187,459 68,973 148,001

10 186,537 61,417 209,418 11 181,135 53,368 262,786 12 175,688 46,320 309,106 13 169,944 40,095 349,201 14 168,746 35,626 384,827 15 167,659 31,675 416,502



2 2 4 5 0 0

5 1 2 3 0 0

0 1 1 0 0

0 2

0 2 2 0 0 0

32

Several facilities in the Southeast area need to upgrade existing scanner equipment to better serve customersand produce higher quality analysis / treatments. The Atlanta Bank has agreed to finance $ 500,000 towards

Tax Benefitof Interest

12,375 10,307

8,053 5,597 2,919

(1): $ 650,000 of this price is subject to capitalization. Depreciation deducted on the tax returnTax Benefit

Depreciation89,375 44,688 22,344 11,172 11,172

Less Net Add Back Working CashTaxes Income Depreciation Capital Flow(16,720) 44,080 325,000 (29,500) 339,580 (60,995) 160,805 162,500 (33,100) 290,205 (79,379) 209,271 81,250 (35,600) 254,921 (90,564) 238,761 40,625 (37,900) 241,486 (85,356) 225,031 40,625 (38,400) 227,256 (93,442) 246,348 (39,200) 207,148 (91,190) 240,410 (40,400) 200,010 (88,605) 233,595 (41,200) 192,395 (86,103) 226,998 (41,900) 185,098 (85,993) 226,708 (42,300) 184,408 (84,150) 221,850 (42,800) 179,050 (82,266) 216,884 (43,600) 173,284 (80,438) 212,063 (44,100) 167,963 (80,135) 211,265 (44,600) 166,665 (79,778) 210,323 (45,100) 165,223

Net Tax Benefit Tax Benefit Loan Working Cash

Income Depreciation Interest Payment Capital Flow279,705 89,375 12,375 (128,546) (29,500) 223,409 278,618 44,688 10,307 (128,546) (33,100) 171,966 268,178 22,344 8,053 (128,546) (35,600) 134,428 268,214 11,172 5,597 (128,546) (37,900) 118,536 254,484 11,172 2,919 (128,546) (38,400) 101,628 246,348 (39,200) 207,148 240,410 (40,400) 200,010 233,595 (41,200) 192,395 226,998 (41,900) 185,098 226,708 (42,300) 184,408 221,850 (42,800) 179,050 216,884 (43,600) 173,284 212,063 (44,100) 167,963 211,265 (44,600) 166,665 210,323 (45,100) 165,223

J154

We could just deduct depreciation before tax and then add it back to Net Income. Another approach is to simply add back the "tax benefit" of depreciation. You can do it either way!

K154

Interest Expense is a tax deduction. We could have simply deducted the entire interest amount in arriving at Taxable Income. Instead, we added the tax benefit and then deducted the entire loan payment.

L154

Since we did not deduct Interest Expense in arriving at Taxable Income, we show the entire financing cash outflow, but we offset it with the "tax benefit" of interest expense in the previous column.

M154

Net Working Capital does not include interest bearing items, such as Short Term Loan Payable since our discount rate accounts for financing costs.

(a)(b)(c)


E Canadian Partnership

Project Information

Project Description > Expand Toronto Urban CentersProject Benefits > Market expansion, new source of revenues, leverage of assetsProject Location > TorontoResponsible Division > Canadian DivisionResponsible Department > MarketingContact Person Name > Allen J. HerbertEstimated Project Start Date > 04/01/92Classification > 8 Justification > CPriority > 3

Preliminary Review





Miscellaneous Attributes:M1 Expands Human Resource CapitalM2 Enhances workforce productivity

M3 Project meets a critical regulatory, security or specific needM4 Project fits with company strategy and goalsM5 Probability of project success is very high / low riskM6 Other Misc Attribute _____________________________________M7 Other Misc Attribute _____________________________________M8 Other Misc Attribute _____________________________________



Project Summary

In order to establish a toehold position in the Toronto area, a joint venture investment will be made since the current major provider in Toronto needs improved child care services for theurban areas of Toronto. Medical Services USA will provide personnel and overall managementfor urban child care. In return, Medical Services USA will share in the profits 50% / 50%. The JointVenture Agreement has a ten year term period.

Financial Analysis (all amounts are expressed in Canadian Dollars)Convert to U.S.$ *

Initial Relocation / Setup Costs $750,000 1.12 $840,000 Ten Year Projected Income Statement Adj to

Year Sales Cost of Income Less Net Cash(100%) Service before Tax Taxes Income Flow

1 ** 637,500 270,000 367,500 79,500 288,000 42,0002 895,000 366,000 529,000 119,000 410,000 82,0003 912,000 377,000 535,000 101,000 434,000 55,0004 942,000 378,000 564,000 104,000 460,000 68,0005 977,000 370,000 607,000 112,000 495,000 88,0006 1,015,000 368,000 647,000 129,000 518,000 90,0007 1,045,000 362,000 683,000 140,000 543,000 110,0008 1,088,000 355,000 733,000 138,000 595,000 115,0009 1,135,000 350,000 785,000 151,000 634,000 122,000

10 1,180,000 348,000 832,000 157,000 675,000 135,000

* convert from Canadian Dollars to U.S. Dollars** partial year in 1992

Economic Analysis (U.S. Dollars)

Summarize Cash Outflows and Inflows for Project:Cash Present

Year Flows Value Payback

0 (840,000) (840,000) 1 189,750 167,181 (672,819) 2 290,280 225,333 (447,486) 3 295,845 202,338 (245,148) 4 316,800 190,898 (54,250) 5 341,055 181,069 126,819 6 355,680 166,374 293,193 7 382,005 157,434 450,626

8 415,350 150,816 601,442 9 442,260 141,486 742,929




Economic Assessment



Risk Analysis







D137





10 380,050 473,850 517,100 461,213 105,845 2,775,800 3,502,875 3,801,000 3,395,638 800,754




0 (840,000) (840,000)1 177,500 156,388 (683,612)2 279,740 217,152 (466,461)3 286,498 195,945 (270,516)4 304,538 183,509 (87,007)5 329,603 174,989 87,982 6 346,015 161,853 249,835 7 372,203 153,394 403,228 8 405,175 147,121 550,350 9 433,155 138,574 688,923



3 2 4 4 0 0

1 4 4 3 0 0

0 2 0 0 0

0 0

0 3 2 0 0 0

32

urban areas of Toronto. Medical Services USA will provide personnel and overall managementfor urban child care. In return, Medical Services USA will share in the profits 50% / 50%. The Joint

EstimatedCash 50% Convert Flow Share to U.S.$ *330,000 165,000 1.15 189,750492,000 246,000 1.18 290,280489,000 244,500 1.21 295,845528,000 264,000 1.20 316,800583,000 291,500 1.17 341,055608,000 304,000 1.17 355,680653,000 326,500 1.17 382,005710,000 355,000 1.17 415,350756,000 378,000 1.17 442,260810,000 405,000 1.17 473,850


1.00 (a)1 (b)1 (c)1

0.66

1.4 12

25.00%50.00%25.00%

100.00%


0.314 0.238 0.211 0.252 0.241 0.229 0.226 0.248 0.213 0.229 0.236


F Regulatory Compliance NE

Project Information

Project Description > Regulatory Compliance in NEProject Benefits > ComplianceProject Location > Northeast Regional Office - Boston, MAResponsible Division > FinanceResponsible Department > FinanceContact Person Name > Carl Jackson, V.P. FinanceEstimated Project Start Date > 01/01/92Classification > 9 Justification > EPriority > 2

Preliminary Review





Miscellaneous Attributes:M1 Expands Human Resource Capital

M2 Enhances workforce productivityM3 Project meets a critical regulatory, security or specific needM4 Project fits with company strategy and goalsM5 Probability of project success is very high / low riskM6 Other Misc Attribute _____________________________________M7 Other Misc Attribute _____________________________________M8 Other Misc Attribute _____________________________________



Project Summary

A major regulatory change is expected to change certain services in the Northeastern United States.In order to meet this new mandate, an investment is required in field personnel, training, andequipment. Revenues from the new services are also forecasted based on demand in Californiawhich adopted this regulatory change two years ago. The regulatory change is subject to futuremodification and therefore, the project is only projected over two years on a month to month basis.There is no initial investment required for this project.

Economic Analysis (Cash Flows by Month)

MonthlyPeriod Setup Service Misc / Total Net Cash

Date Revenues Costs Costs Taxes Outflows Flow

1 31-Jan-92 35,200 -16,000 -3,500 -2,500 -22,000 13,2002 28-Feb-92 39,400 -5,000 -3,500 -2,000 -10,500 28,9003 31-Mar-92 41,000 -3,500 -3,500 -2,000 -9,000 32,0004 30-Apr-92 42,550 -1,500 -4,000 -1,750 -7,250 35,3005 31-May-92 43,990 -1,500 -4,000 -1,750 -7,250 36,7406 30-Jun-92 44,550 -2,000 -4,000 -1,750 -7,750 36,8007 31-Jul-92 45,100 -4,500 -1,650 -6,150 38,9508 31-Aug-92 46,990 -4,500 -1,650 -6,150 40,8409 30-Sep-92 47,800 -4,500 -1,650 -6,150 41,650

10 31-Oct-92 48,650 -5,100 -1,500 -6,600 42,05011 30-Nov-92 49,280 -5,100 -1,500 -6,600 42,68012 31-Dec-92 48,300 -5,100 -1,500 -6,600 41,700

1992 Total 532,810 -102,00013 31-Jan-93 47,100 -10,000 -5,800 -1,350 -17,150 29,95014 28-Feb-93 45,500 -2,000 -5,800 -1,350 -9,150 36,35015 31-Mar-93 44,100 -5,800 -1,350 -7,150 36,95016 30-Apr-93 42,400 -6,200 -1,275 -7,475 34,92517 31-May-93 41,000 -6,200 -1,275 -7,475 33,52518 30-Jun-93 39,100 -6,200 -1,275 -7,475 31,62519 31-Jul-93 38,500 -6,750 -1,205 -7,955 30,54520 31-Aug-93 37,900 -6,750 -1,205 -7,955 29,945

21 30-Sep-93 37,100 -6,750 -1,205 -7,955 29,14522 31-Oct-93 36,800 -7,000 -1,170 -8,170 28,63023 30-Nov-93 36,400 -7,000 -1,170 -8,170 28,23024 31-Dec-93 36,000 -5,000 -7,000 -1,170 -13,170 22,830

1993 Total 481,900 -109,250Total 1,014,710 -211,250

Annual

Required Rate of Return for Project => 6.50%

Net Present Value Rate of Return (IRR Annual Basis)Discounted Payback Immediate

Economic Assessment



Risk Analysis

Risk Premium Applied to Project 0.00% (Required for Compliance)








D132


Month Pesimist Normal Optomist Value (Abs Risk)1 12,050 13,129 13,700 13,081 1,200 2 26,200 28,589 29,900 28,493 2,684 3 28,830 31,486 32,920 31,374 2,971 4 31,390 34,545 36,050 34,373 3,417 5 32,710 35,761 37,430 35,637 3,425 6 32,600 35,626 37,250 35,497 3,379 7 34,170 37,505 39,250 37,354 3,699 8 35,870 39,113 40,900 38,984 3,648 9 36,275 39,673 41,470 39,523 3,780

10 36,510 39,839 41,680 39,708 3,748 11 36,810 40,218 42,050 40,073 3,808 12 35,860 39,083 40,920 38,967 3,660

Annual Sub Total 413,063 13 25,620 27,919 29,200 27,830 2,594 14 30,850 33,702 35,240 33,582 3,189 15 31,170 34,074 35,630 33,950 3,242 16 29,350 32,033 33,510 31,926 3,017 17 27,960 30,583 31,920 30,457 2,889 18 26,300 28,695 30,010 28,599 2,691 19 25,120 27,565 28,850 27,456 2,715 20 24,470 26,878 28,140 26,769 2,672 21 23,690 26,019 27,300 25,926 2,619 22 23,150 25,422 26,700 25,337 2,570 23 22,660 24,932 26,200 24,845 2,565 24 18,230 20,054 21,100 19,990 2,075

Annual Sub Total 336,665 687,845 752,443 787,320 749,729 72,259



Expected Present Dates Values Value

1 13,129 13,058 2 28,589 28,282 3 31,486 30,979 4 34,545 33,807 5 35,761 34,808 6 35,626 34,490 7 37,505 36,113 8 39,113 37,458 9 39,673 37,791

10 39,839 37,744 11 40,218 37,898 12 39,083 36,629 13 27,919 26,025 14 33,702 31,247

15 34,074 31,422 16 32,033 29,381 17 30,583 27,900 18 28,695 26,036 19 27,565 24,876 20 26,878 24,126 21 26,019 23,229 22 25,422 22,573 23 24,932 22,019 24 20,054 17,615


Net Present Value $705,507 Rate of Return (IRR Annual Basis) 92.45%Discounted Payback Immediate 0

2 3 4 3 0 0

2 3 3 2 0 0

3 1 0 0 0

0

0 5 2 1 0 0 0

34

A major regulatory change is expected to change certain services in the Northeastern United States.

equipment. Revenues from the new services are also forecasted based on demand in Californiawhich adopted this regulatory change two years ago. The regulatory change is subject to futuremodification and therefore, the project is only projected over two years on a month to month basis.

Present PresentValue Value

(simple calc) (functional)13,129 13,12928,589 28,59031,486 31,48834,545 34,55135,761 35,77135,626 35,64237,505 37,52739,113 39,14439,673 39,71439,839 39,88940,218 40,28039,083 39,155

27,919 27,98033,702 33,78834,074 34,17332,033 32,14030,583 30,69828,695 28,81527,565 27,69526,878 27,018

26,019 26,16825,422 25,58224,932 25,10320,054 20,204

752,443 754,244

Monthly0.54% Calculate IRR (annual basis):

752,443 Annual Annual123% Outflow Inflow

0-102,000 532,810-109,250 481,900

Project must meet at least two of the three Economic Criteria, otherwise special

(Required for Compliance)


1.00 (a)1 (b)1 (c)1

0.754

1.25 6

15.00%65.00%20.00%

100.00%

Coeff of Adjusted AdjustedVariation Inflows Outflows

I112

Since we have monthly cash flows, we would use the XIRR Function. However, Microsoft Excel does not accept an "array" for input values for the XIRR Function; but the IRR Financial Function doesl accept a "mix" or array of values. Since we have both positive and negative cash flows for each period, we have a mix or arrary of values and only the IRR Function will work. In order to use the IRR function, we will summarize cash flows on an annual basis. We could also use the Solver Function to solve for finding the rate where the discounted inflows = discounted outflows. NOTE: Negative values need to come first in the array or range that Excel uses to calculate the IRR.

(Rel Risk)0.092 0.094 0.095 0.099 0.096 0.095 0.099 0.094 0.096 0.094 0.095 0.094

0.093 0.095 0.095 0.095 0.095 0.094 0.099 0.100 0.101 0.101 0.103 0.104

0.096

Calculate IRR (annual basis):

Annual AnnualOutflow Inflow

-102,000 413,063-109,250 336,665


Summarize Economic and Risk Analysis for All Projects

Project Required Preliminary Justification PriorityRef Project Name Investment Points Code Code

A Diesel Generation System $182,080 27 F 2B New Clinic in Kansas City $141,000 24 C 3C Upgrade to DuBois Center $1,780,000 31 C 3D Southeastern Upgrades $1,215,000 32 C 3E Expand Toronto Urban Centers $840,000 32 C 3F Regulatory Compliance in NE $0 34 E 2

* Provide additional narrative information on "strategic" reasons for making this investment since the return is less than the cost of investments (cost of capital).

Using Solver for Program Constraints

Financial Modeling Textbooks provide useful examples of how Excel Solver can be used to solve for capital budgeting program decisions given a set of constraints. The following example will illustrate how we could apply Solver for finding the right set of projects given a set of contraints:

Example:Objective: Maximize Net Present Value of Projects Contraints: Year 1: Only $ 200,000 can be spent on all capital projects Year 2: Only $ 150,000 can be spent on all capital projects

Year 3: Only $ 120,000 can be spent on all capital projectsYear 4: Only $ 100,000 can be spent on all capital projectsYear 5: Only $ 75,000 can be spent on all capital projects

Five Projects require investments over five years and have the following Net Present Values:

Select?Project 0 = No < - - - - - Five Year Capital Budgets for Each Project - - - - - >

Ref 1 = Yes Project Name NPV Year 1 Year 2 Year 3

A 1 Annual Marketing Program 650,000 45,000 40,000 38,000B 0 IT Infrastructure Development 820,000 55,000 60,000 60,000C 1 Executive Leadership 540,000 25,000 20,000 20,000D 1 HR Capital Improvement 701,000 35,000 30,000 30,000E 0 Product Research 490,000 50,000 45,000 42,000 Total (SumProduct) 1,806,385 99,051 85,282 83,672

Maximum Allowed Budget 200,000 150,000 120,000

We will enter the following constraints into Solver:

$ 45,000 A + $ 55,000 B + $ 25,000 C + $ 35,000 D + $ 50,000 E .LE. $ 200,000$ 40,000 A + $ 60,000 B + $ 20,000 C + $ 30,000 D + $ 45,000 E .LE. $ 150,000$ 38,000 A + $ 60,000 B + $ 20,000 C + $ 30,000 D + $ 42,000 E .LE. $ 120,000

F7

A = Cost Reduction B = Replacement C = Expansion / Addition D = Service Improvement E = Safety & Compliance F = Operating Necessity G = Other

G7

1 = Carryover project, already in progress, requires additional funding 2 = Essential for continued operations, regulatory compliance, etc. 3 = Economically desired for revenue growth, cost reductions, etc. 4 = General improvement for building or expanding the business

B19

Solver is selected from the main toolbar: Tools -> Solver. We will solve for a Target Cell, asking Solver to find the maximum or minimum values by changing a set of variables (cells) given a set of constraints.

B38

Solver will change these values since these are the "variables" in our problem. Solver will also produce a report - Answer Report 1.

D43

This is the "set" cell we will use with Solver.

E43

Constraints used with Solver start with this cell. We need to make sure we compare an equal set of arrays; I.e. compare the arrary or range E43:I43 against the range E44:I44.

$ 35,000 A + $ 58,000 B + $ 18,000 C + $ 28,000 D + $ 40,000 E .LE. $ 100,000$ 35,000 A + $ 55,000 B + $ 17,000 C + $ 27,000 D + $ 40,000 E .LE. $ 75,000

Each of the above constraints recognizes that we can spend no more than what is budgeted each year. We alsohave the equation we are trying to solve for: Maximize NPV = $ 650,000 A + $ 820,000 B + $ 540,000 C + $ 701,000 D + $ 490,000 E

We will also use as our variables "0" for No and "1" for Yes as to which projects we should select given the aboveconstraints and equation. The "maximum" NPV will show up in our "set" cell which is cell D43.

Now go to the main toolbar, select Tools -> Solver and enter the following:

1. Target Cell is D432. Equal to: Select the Max button since we are solving for maximum values.3. By Changing Cells: Select the range B38:B42 as our variables.4. Subject to Constraints: Add two contraints as follows:

B38:B42 .EQ. Binary EQ or = (equal)E43:I43 .LE. E44:I44 LE or <= (less than or equal to)

5. Click on Solve. The Find Solution dialog box may pop up. Click on Answer. Solver will change the variables(which we first entered all as zero's in cells B38:B42) and produce a report (Answer Report 1)

Using Excel Solver, we would select Projects A, C, and D!

C68

Constraints in Solver consists of three components: 1. Cell Reference (such as $B$38:$B$42) 2. Operator (such as bin for binary) 3. Constraint (default is binary when bin is operator)

9.50% <= weighted average cost of capitalrate of return is less than weighted average cost of capital *

(years)Project Rate of Payback Risk Relative AbsoluteValue Return Period Factor Risk Risk

$34,761 10.07% 6.6 9.5 0.52 $164,674$4,127 9.68% 19.0 18.5 1.26 $540,660

$715,502 11.12% 8.2 6.1 0.12 $531,419$416,502 9.33% 8.0 11.2 0.13 $403,897$818,923 16.58% 5.5 12.3 0.24 $800,754$705,507 92.45% 0.0 5.7 0.10 $72,259

* Provide additional narrative information on "strategic" reasons for making this investment since the return is less than the cost of investments (cost of capital).

Financial Modeling Textbooks provide useful examples of how Excel Solver can be used to solve for capital budgeting program decisions given a set of constraints. The following example will illustrate how we could apply Solver for finding the right set of projects given a set of contraints:

< - - - - - Five Year Capital Budgets for Each Project - - - - - >Year 4 Year 5

35,000 35,00058,000 55,00018,000 17,00028,000 27,00040,000 40,00077,154 75,000

100,000 75,000

LE: Less than or Equal to

H7

Net Present Value of Expected Cash Flows

I7

Modified Internal Rate of Return using expected cash flows of project.

Each of the above constraints recognizes that we can spend no more than what is budgeted each year. We also

We will also use as our variables "0" for No and "1" for Yes as to which projects we should select given the above

5. Click on Solve. The Find Solution dialog box may pop up. Click on Answer. Solver will change the variables

Microsoft Excel 9.0 Answer ReportWorksheet: [CBAnalysis.xls]SummaryReport Created: 2/26/2003 9:58:29 AM

Target Cell (Max)Cell Name Original Value Final Value

$D$43 Total (SumProduct) NPV 0 1,806,385

Adjustable CellsCell Name Original Value Final Value

$B$38 A 1 = Yes 0 1$B$39 B 1 = Yes 0 0$B$40 C 1 = Yes 0 1$B$41 D 1 = Yes 0 1$B$42 E 1 = Yes 0 0

ConstraintsCell Name Cell Value Formula Status Slack

$E$43 Total (SumProduct) Year 1 99,051 $E$43<=$E$44 Not Binding 100948.6953$F$43 Total (SumProduct) Year 2 85,282 $F$43<=$F$44 Not Binding 64717.9446$G$43 Total (SumProduct) Year 3 83,672 $G$43<=$G$44 Not Binding 36328.20554$H$43 Total (SumProduct) Year 4 77,154 $H$43<=$H$44 Not Binding 22846.15817$I$43 Total (SumProduct) Year 5 75,000 $I$43<=$I$44 Binding 0$B$38 A 1 = Yes 1 $B$38=binary Binding 0$B$39 B 1 = Yes 0 $B$39=binary Binding 0$B$40 C 1 = Yes 1 $B$40=binary Binding 0$B$41 D 1 = Yes 1 $B$41=binary Binding 0$B$42 E 1 = Yes 0 $B$42=binary Binding 0

Documents

Workbook3.xls - Excellence in Financial Management - … files/Workbook3.xls · XLS file · Web view2017-06-16 · Answer Report 1 Summary Project F Project E Project D Project C