Galaxy Satellite Co Is Trying To Select The Best Group ✓ Solved

Galaxy Satellite Co Is Attempting To Select the Best Group Of Independent Projects

Galaxy Satellite Co. is attempting to select the best group of independent projects competing for the firm's fixed capital budget of $10,000,000. Any unused portion of this budget will earn less than its 20 percent cost of capital. A summary of key data about the proposed projects follows. Project PV of inflows Initial investment IRR A $3,050,000 $3,000,000, IRR ?, B $9,320,000 $9,000,000, IRR ?, C $1,060,000 $1,000,000, IRR ?, D $7,350,000 $7,000,000, IRR ? Use the NPV approach to select the best group of projects. (Note that just the PV of inflows is given; you must subtract the initial investment to find the NPV.) Use the IRR approach to select the best group of projects. (Note that the discount rate or the cost of capital is 20%.) Which projects should the firm implement based on your analysis of both techniques and given the capital rationing amount? Write an email to your boss, Andy Fast, the CFO, explaining your rationale proving the choices based on the considerations of shareholder value and the maximum investment budget. Keep in mind that you are less concerned with using the whole budget than with maximizing the total return to Galaxy Satellite. Double space Times New Roman font. #3 above should be 1-2 pages long, but can reference NPV and IRR tables embedded in the report. Use APA style table formatting.

Sample Paper For Above instruction

Subject: Investment Project Selection Analysis for Galaxy Satellite Co.

Dear Mr. Fast,

I am writing to provide a comprehensive analysis of potential projects for Galaxy Satellite Co., focusing on maximizing shareholder value within our capital budgeting constraints. Our primary challenge is selecting projects that offer the highest returns relative to the firm’s fixed capital budget of $10 million, considering both net present value (NPV) and internal rate of return (IRR) methods. The goal is to choose projects that contribute most significantly to shareholder wealth without necessarily exhausting the entire budget, as leftover funds would earn less than our required 20% cost of capital.

Based on the data provided, we evaluate each project’s NPV and IRR. The PV of inflows and initial investments are as follows:

Calculating the NPV for each project (NPV = PV of inflows - initial investment):

• Project A: $3,050,000 - $3,000,000 = $50,000
• Project B: $9,320,000 - $9,000,000 = $320,000
• Project C: $1,060,000 - $1,000,000 = $60,000
• Project D: $7,350,000 - $7,000,000 = $350,000

These positive NPVs indicate that all projects, individually, contribute value exceeding their costs at the prevailing discount rate of 20%. Next, examining the IRRs, which are all above 20%, confirms their profitability. However, selection must consider capital constraints.

Applying a capital rationing approach, we prioritize projects with the highest NPVs. The projects in order of descending NPV are:

1. Project D: $350,000
2. Project B: $320,000
3. Project C: $60,000
4. Project A: $50,000

Since the total initial investments of Projects D, B, and C sum to $17,000,000, which exceeds our $10 million budget, we must choose a subset that maximizes return without surpassing this limit.

Considering the budget constraints, the optimal combination includes Project D ($7 million) and Project C ($1 million), totaling $8 million, which leaves room for additional projects. To further optimize, including Project A ($3 million) would reach the budget limit exactly ($7 million + $1 million + $3 million = $11 million), exceeding the budget. Instead, selecting Projects D and C yields a combined initial investment of $8 million, and adding Project A would exceed the budget.

Alternatively, selecting Projects D and A would total $10 million exactly ($7 million + $3 million), maximizing the utilization of our budget and overall value. This combination provides NPVs of $350,000 + $50,000 = $400,000, which surpasses other feasible combinations.

Therefore, based on the NPV approach, the firm should implement Projects D and A to maximize shareholder value within the capital constraints.

Similarly, evaluating IRRs confirms that all these projects have IRRs greater than 20%, making them individually acceptable. The combination D and A respects the budget and maximizes total value; therefore, the dual approach supports selecting these projects.

In conclusion, focusing on shareholder wealth maximization, the recommended project portfolio includes Projects D and A, aligning with our investment limit and maximizing returns. These choices reflect strategic prioritization of projects with the highest NPVs and IRRs exceeding our hurdle rate, ensuring prudent capital allocation and enhancing shareholder value.

I am available to discuss this analysis further or explore alternative combinations if needed.

Sincerely,

[Your Name]

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