Capital Budgeting and Cost of Capital Report

“We need your input!”

As the CFO of IPS, you are responsible for managing the IPS employee pension fund. Like any pension fund, yours has physical and financial assets, and liabilities. You must decide how the pension fund money will be invested. Your decisions will affect the well-being of your firm and its employees. As a successful fund manager, you know that an understanding of the time value of money is key.

You urge your staff to investigate the investment potential of a variety of financial products and services including money markets, real estate, stocks, and insurance products. Your goal is to realize the maximum benefit for your clients.

Since IPS is still a relatively small company, you are also responsible for decisions on product viability and financing. While your staff is investigating pension fund investments, you get the following email message from the CEO.

“Remember the production analysis you did on the Android01? I need you to put together an analysis of the suitability of the project. Crunch the numbers and give me an idea of the value of the project. Thanks for your help!”

You’ve barely had time to think about what you’ve read when you get another message from the CEO.

“Meant to ask you about the cost of capital. If we do decide to move forward with the Android01 project, we’ll need to determine our best source of capital. As far as I can tell, we have three options:

  • a loan from the bank
  • collaboration with another firm
  • liquidation of securities owned by IPS

 

Compare the three financing options and estimate NPVs and IRRs from the costs and expected cash flows. Just include that in your analysis. Thanks again!”

This project will require you to determine the suitability of a candidate project using capital budgeting techniques based on time value of money, and taking care to distinguish between different forms of costs and revenues. You will determine the long-term capital requirements needed to support the organization and analyze different methods of financing.

Begin with “Step 1: Time Value of Money Calculations”