Ford Allen, CEO of the Amstelveen Corporation, has some major managers are clamoring for investment in projects totaling €34,000,000. Allen is working to fund them all, but currently only has €8,000,000 available for Amstelveen to invest. Proposals (all amounts in € thousands) Project B. D. Initial Investment 1,000 2,000 5,000 8,000 5,000 10,000 3,000 500 1,500 4,800 2,000 2,000 3,000 1,500 2,000 1,200 400 Year 1 1,000 1,000 1,000 2,000 3,000 6,000 8,000 5,000 500 -3,000 2,000 1,000 200 4,000 2,500 3,000 Year 2 1,500 2,000 3,000 Year 3 500 300 Year 4 1,000 1,500 Year 5 Amstelveen's cost of capital is 9%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value. Allen has tasked you, an employee in the corporate controller's office, with several tasks. First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue. Calculate this using the three methods of calculating capital budgeting that we covered in class (not ARR, we did not do any math with that method). If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria. Second, give the recommended total that you suggest Amstelveen raise, in addition to the €8,000,000 it already has, in order to invest in your recommended projects. Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to C8,000,000. Make sure to clearly explain the basis for your recommendation. Note: you cannot recommend abandoning Project C when it becomes negative in Year 4. Annual cash SMO.
Ford Allen, CEO of the Amstelveen Corporation, has some major managers are clamoring for investment in projects totaling €34,000,000. Allen is working to fund them all, but currently only has €8,000,000 available for Amstelveen to invest. Proposals (all amounts in € thousands) Project B. D. Initial Investment 1,000 2,000 5,000 8,000 5,000 10,000 3,000 500 1,500 4,800 2,000 2,000 3,000 1,500 2,000 1,200 400 Year 1 1,000 1,000 1,000 2,000 3,000 6,000 8,000 5,000 500 -3,000 2,000 1,000 200 4,000 2,500 3,000 Year 2 1,500 2,000 3,000 Year 3 500 300 Year 4 1,000 1,500 Year 5 Amstelveen's cost of capital is 9%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value. Allen has tasked you, an employee in the corporate controller's office, with several tasks. First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue. Calculate this using the three methods of calculating capital budgeting that we covered in class (not ARR, we did not do any math with that method). If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria. Second, give the recommended total that you suggest Amstelveen raise, in addition to the €8,000,000 it already has, in order to invest in your recommended projects. Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to C8,000,000. Make sure to clearly explain the basis for your recommendation. Note: you cannot recommend abandoning Project C when it becomes negative in Year 4. Annual cash SMO.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Ford Allen, CE0 of the Amstelveen Corporation, has some major decisions to make. Seven division
managers are clamoring for investment in projects totaling €34,000,000. Allen is working to fund
them all, but currently only has €8,000,000 available for Amstelveen to invest.
Proposals (all amounts in € thousands)
Project
B.
D
Initial Investment 1,000 2,000 5,000 8,000 5,000 10,000 3,000
500 1,500 4,800 2,000 2,000
1,000 1,000 1,000 2,000 3,000
500
3,000 1,500
2,000 1,200
1,500
2,000
Year 1
Year 2
6,000 8,000 5,000
500 -3,000 2,000 1,000
200 -4,000 2,500 3,000 3,000
400
Year 3
300
1,000
1,500
Year 4
Year 5
Amstelveen's cost of capital is 9%, it uses a payback period cut-off of 2 years, and it calculates
depreciation on a straight-line basis with the assumption of a zero salvage value.
Allen has tasked you, an employee in the corporate controller's office, with several tasks.
First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue.
Calculate this using the three methods of calculating capital budgeting that we covered in class (not
ARR, we did not do any math with that method). If there are any contradictory recommendations
(i.e., recommended under payback but not recommended under IRR), explain how this is possible and
what you would recommend as the dominant criteria.
Second, give the recommended total that you suggest Amstelveen raise, in addition to the
€8,000,000 it already has, in order to invest in your recommended projects.
Third, Allen wants a recommendation on which project(s) the company should pursue if it remains
limited to €8,000,000. Make sure to clearly explain the basis for your recommendation.
Note: you cannot recommend abandoning Project C when it becomes negative in Year 4.
Annual cash
flows
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