P4_FInal_Villarreal_Report_4Sept2023

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1 031422 Project 4 Questions - Report Template Instructions: Answer the five questions below, based on the information that you developed in the Excel workbook. Provide support for your reasoning from the readings in Project 4, Step 1, and the discussion in Project 4, Step 3. Be sure to cite any sources used in proper APA (7th ed.) format. Provide a detailed response below each question. Use 12-point font and double spacing. Maintain the existing margins in this document. Your final Word document, including the questions, should not exceed 5 pages. Include a title page in addition to the five pages. Any tables and graphs you choose to include are excluded from the five-page limit. Name your document as follows: P4_Final_lastname_Report_date. You must address all five questions and make full use of the information in the Excel workbook. You are strongly encouraged to exceed the requirements by refining your analysis. Consider other tools and techniques that were discussed in the required and recommended reading for Project 4.

3 1. Present-value calculations, rather than future-value calculations, are the key to analysis in the field of corporate finance. Why is this the case? Explain the importance for Largo Global Inc. (LGI) of understanding today's value of projected future revenues and/or costs. By operating with current and future value calculations, investors have the ability to calculate the worth of cash flow in a better way, which is important to the study of business finance. Current value calculations calculate the worth of future investment based on present currency, instead of the future value estimates that consider the effect of compound interest. Buyers would instead buy items immediately, a reason why the value of money is an important notion in finance (Parrino, et al, 2012). The value of the dollar tends to change often and that is something LGI should take into consideration because a business can invest the funds and produce interest. The reason for this is because interest rates are low now but will only increase as time goes. Corporate finance decisions are contingent on applying the time value of money because investment decisions consist of associating the value of current investments to the value of future cash flows. By separating the value of assets that offer various returns, LGI can analyze the current value of expected future income or costs. Present-value estimates indicate the company's real financial situation, LGI is broadly engaged in corporate finance research. Inflation and the discount rate are taken into account in the present-value calculations, producing a current value for all cash flows available. The amount of this analysis is then used to regulate the current value of the investment, instead of the estimates of future value that rely on interest rates only and not inflation. To calculate the value of cash flow in the future, future value evaluations use the combination method. Since it predicts earnings for the future, it is less

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4 critical when picking investments. When making decisions for investments, investors ought to arrange present value over future value because the previous is more precise predictor of the possible future financial benefits of present resources today. Being aware of the current value of projected future income and expenses is vital to plan LGI's financial strength using present- value calculations properly. 2. Based on your calculations in Tab 2, Question 8, which offer should LGI except for the Bowie plant? Explain why. Be sure to include the concepts of risk and potential return as part of your discussion. LGI should accept Offer A for the Bowie plant of $102.17 million paid to LGI immediately. The other offers presented, appear to have a negative present value because they are being spread out over 8 years, but the full payout can be invested to purchase new acquisitions that will produce additional cash flows and be able to earn interest immediately, to involve other investing opportunities (Parrino et al., 2012). The other choices for larger Future Values, with compounding, they repeatedly lose Present Value as they advance from the starting point. LGI ought to think about taking the direct disbursement because they will be able to use the money to counterbalance the original investment for the new development and increase its profitability. 3. The proposed sale of the Bowie plant is part of a larger effort to divest the company of underperforming assets. A total of $1.3 billion in assets, with a book value of $750 million, have been identified for potential sale. Assuming that all these sales could all be accomplished in 2022, identify the major impacts on the following: a. Balance Sheet, especially these accounts:  Property, plant, and equipment  Accumulated depreciation  Net property, plant, and equipment b. Statement of Cash Flows, especially Long-Term Investing Activities c. Income Statement, especially Net Income

5 Explain the potential impacts, both positive and negative, of these changes for LGI. If the sale of the Bowie company happened, the total property, plant, and equipment would be lowered. The balance sheet would go through a tough phase because of this. Once the factory is sold, the business will have fewer property, plant, and equipment than beforehand. Bowies financial sheet would go through a struggle because they would have less resources to report. By selling the Bowie property, it would lower the business’s accumulated depreciation. Because the Bowie location is no longer owned by the company, the total depreciation will drop once it’s sold. Bowie’s financial sheet would be impacted for having less assets to report. The businesses net property, plant, and equipment would lessen with the Bowie site being sold. The financial statements would end up showing some mishaps of when it sold. If the Bowie location were sold, it would lower the company's net property, plant, and equipment because Bowie would no longer own the business in that location. The company's financial sheet would also go through tough times because of having less assets to report. The sale would decrease long-term investment movement on cash flows since Bowie would not be the property owner of that location. This will not be good for the business because it lowers the investment resources, they have available. If the business sold its office, it would have fewer physical assets, and their financial statements would suffer because of it. 4. Based on your calculations in Tab 3, Questions 1–4, should LGI proceed with the acquisition of the robotics-based sorting and distribution equipment? Explain your reasoning. How would the acquisition fit into the efforts to turn the company around? The set prices on Questions 1-4 in Tab 3 make it difficult for LGI to buy robotic sorting and distribution equipment. While the expected profit from working with the technology

6 wouldn’t cover the acquisition cost, regardless of the equipment cost, the investment would be important (Davis, 2011). This deal should be evaded because it can weaken LGI’s current chances to progress their condition. Given that the anticipated profit from utilizing the technology wouldn’t fulfill the cost of the acquisition, the investment would be critical in spite of the prices of new equipment. This transaction should be prevented because it would challenge LGI’s recent efforts to progress their status quo. Based off the answers to questions 1-4, LGI shouldn't contribute in the robotic sorting and distribution equipment they expected to purchase. According to the results, LGI would be smart to cancel any plans for purchase. Since the new equipment needed would be too expensive and would not bring in plenty of profit to justify the investment, the choice to purchase would remain. The reason for that is because the investment would be needed despite whether the extra profits made by the technology would be enough to pay the costs. The planned acquisition is not constant with the present approach of the company. Even though the new equipment would be overly expensive and would not bring in sufficient profits to justify the investment, the verdict to purchase would remain (Davis, 2011). The planned acquisition is not dependable with the present strategy of the company. Even though the new equipment would be too expensive and would not bring in enough profit to make the investment worth it, the purchase would remain. This is for the reason that the investment would be needed regardless if the additional revenue produced by the technology would be enough to pay the charges. 5. In Tab 3, Question 5, did the change in the discount rate make proceeding with the purchase more or less desirable? What do you conclude from this result? Discuss the role of

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7 discount rates in LGI's decision-making process for capital budgeting and new asset acquisition. The discount rate of 5.02% increases the net Present Value to $94.47 million and makes the acquisition more attractive. This recommends that the market will be beneficial to buying new equipment and maximizing profitability in the immediate time. When there is a chance to lower the discount rate it should be done because it progresses the Present Value calculations. The discount rate will every so often be connected to the available loan interest rates if a project is already financed with available cash. If a plan needs a loan for support, then the discount rate will be associated to the loan’s interest total next to the predictable inflation over the life of the development and any related risk (Parrino et al., 2012). When the issues are low then the rates can be reduced and improve the net Present Value calculations for a plan. With loan interest rates recovering that means inflation is low as well, and all risk are alleviated during purchases because the previous plan was inefficient. Capital planning and asset acquisition cannot be made without taking into account the discount rate. Investments are worthy and they can offer long-term returns if the discount rate is lowered. Given that the discount percentage has been lowered, making the purchase is no longer a striking option. Overall, the discount rate is a major aspect for LGI’s choices in the capital budgeting and asset purchase. This is a big opportunity for LGI to obtain new capital resources if done the right way.

8 References Parrino, R. Kidwell, D. S., & Bates, T. W. (2012). Fundamentals of corporate finance. Wiley. Davis, C. E. & Davis, E. (2011). Managerial Accounting. Wiley. Chapter 9, Capital Budgeting Greenlaw, S. A. & Shapiro, D. (Senior Contributor), Principles of Microeconomics 2e