Project: Capital Investment
Sung Kim has run a forklift repair company for years, but she is bored with it and wants to branch out into something new. Her business line of credit has $20,000 of available funds at 6%, and she wants at least an 8% return on top of that.
She is very excited about the idea of buying a small trailer to put in the parking lot of her business. She will sound-proof it, lease air time, and run a talk radio show late at night when she can get air time cheaply. She estimates the following cash flows:
Net cash inflows from operations (projected)
Cash Flow Year 1 2,000
Cash Flow Year 2 4,000
Cash Flow Year 3 8,000
Cash Flow Year 4 16,000
Her spouse and business partner wants her to invest in a used oil-burning furnace that will both heat the shop and provide additional revenue by charging a fee to dispose of used oil for other companies. Local businesses are lined up to sell used oil to Independent Forklift right now, but someone else may grab this opportunity if IF does not.
Cash flows from the oil burner are projected to be:
Net cash inflows from operations (projected)
Cash Flow Year 1 7,500
Cash Flow Year 2 7,500
Cash Flow Year 3 7,500
Cash Flow Year 4 7,500
Both options cost $20,000. Both options have a four-year time horizon. At the end of four years, the talk-radio trailer will have no residual value. The oil burner can be sold for $6,000.
Sung can only do one or the other. She is really only interested in the talk radio and sees that as a way to retire from the forklift repair business. She’s done her research and is confident she can make a go of it.
Make a recommendation to Sung Kim. Choose one or the other option and justify it to her. Make sure you discuss the pros and cons of both options, but also make sure you choose only one.
Address the following in your answer:
Phase 1 – Screening
Begin with the larger picture
Identify and evaluate potential opportunities
Screen opportunities
Phase 2 – Analysis
Estimate operating and implementation costs
Estimate cash flow
Assessment
Phase 3 – Implementation
Select the project
Implement the project
Re-evaluate the decision
For step 9, depending on which option you recommended, do an after-action review based on the following actual results four years later:
Talk Radio
Net cash inflows from operations (actual)
Cash Flow Year 1 4,000
Cash Flow Year 2 7,000
Cash Flow Year 3 7,000
Cash Flow Year 4 6,000
Oil Burner – sold for $4,000 at the end of 4 years
Net cash inflows from operations (actual)
Cash Flow Year 1 8,000
Cash Flow Year 2 8,000
Cash Flow Year 3 8,000
Cash Flow Year 4 8,000
You may use the templates provided to perform calculations for whichever option you choose.
