Capital investment analysis is the tool that managers use to set up the investment process. It is through this analysis that the investment necessities of the company became clear. It also gives an idea about the potential results of the investments to be made. Thus, the first advice for Genette would be to get to know better the building complex she was appointed as supervisor. She has to make an analysis of the present situation of the complex. This pre-analysis will help her determine the first of the six steps used for capital investment analysis: the investment needs. The second step would be to make formal proposals for investments. Thus the other advice would be to get to know the bureaucratic-formal process of writing and presenting an investment plan to the board of managers. After that she has to make a presentation of her proposals before the managing committee. Not only the written proposal but also the oral presentation and the screen accompanying the presentation are important if the plan is to be approved. Hence the third step of the planning process would be the preparation of screen proposals.
The fourth is the establishment of acceptance –rejection standards. After making the pre-analysis of the current situation of the complex she manages and set up the objectives of the investments needed, Genett has to give some evaluation criteria for the plan. These criteria, standards, would determine what is to be considered a success or failure of the investment. She has to demonstrate to the company’s management team that her plan can meet these criteria in order to be a success and avoid failure. The final two steps of the investment analysis, the evaluation of propositions and decision on them, are prerogative of the managing team of the company. Gennet has to do her best for the four steps before in order to get her plan accepted.
For the annual cash inflow of $35,000 we have to use table 4 since we are dealing with an ordinary annuity. If we take a look at the table we see that to find the annual future value for 35 000 at 16% the multiplier is 3.274. The formula to calculate the present value is: Present value = Future value / (1.0 + interest rate)
Future Value = $35,000 x 3.274
Future value = $114,590
Thus the present value for five year of cash inflows of $35,000 instead of $175,000 has the present value of $114,590.
For the second request of having $28,000 to be received at the end of a 10 year period we must use table 3. How much should the company invest today? For this we have to compute the present value evaluation for a 10 year period. In the table we find that for a ten year period the multiplier to be used is 0.322.
Future value = Present value x 0.322
Future value = $28,000 x 0.322
Future value = $9016; this is the sum the company should invest now to receive $25,000 in ten years.
In order to have $28,000 in 2 years should invest: $28000 x 0.827 = $23,128 — This sum is the present value of $28,000 to be received after 2 years at 10% interest rate.
To receive $15,000 after 4 years (10% interest rate) the present investment should be: $15,000 x 0.683 = $10245.2. For a 5 year period should be: $15,000 x 0.621= $9313.8 and for a six year period should be: $15,000 x 0.564 = $8467.1.
The annual report of the company, its interim financial statements, past ratios of the company and average ratios of other companies in the same industry and the SEC form 10-K are all to be considered as potential sources of information for the financial analysis. The assessment of risk and future potential of an investment are to be considered as objectives of the financial analysis because it is the avoidance of risk the max possible and approaching potential valuable investments that should be the goal of the financial analysis. The linking of performance to shareholders values is an executive compensation issue.
Trend analysis
The indexes are calculated according to this formula:
Index = 100% x (index year amount / base year amount)
It is clear from the trend analysis that the company should find new supplying ways because the last three years the cost of goods has risen dramatically, especially the last year. Also, the cost of administrative expenses has been rising gradually at a fixed rate during this years but it would be best if the company finds some way to stop its increase. The key is still the cost of goods. The net sales have been growing positively but the operating profit has been suffering the rise of the cost of goods. Finding ways to cut these cost of goods means increasing directly the operating profit.