JWI 530 Financial Management Assignment 2 Strayer University

Jwi 530 Financial Management Iassignment 2 Strayer University All R

The assignment involves performing a cost-benefit analysis for a proposed capital investment in new equipment within a healthcare manufacturing context. The primary focus is to evaluate whether the company should produce a critical component in-house or continue purchasing it externally. This entails detailed financial calculations based on different scenarios, incorporating variables like project duration, discount rates, savings growth, terminal value, and risk considerations. Additionally, a strategic recommendation and assessment of non-financial factors are required to guide executive decision-making.

Paper For Above instruction

In the context of strategic financial decision-making, the evaluation of a capital investment requires a comprehensive analysis that extends beyond simple cost comparisons. For a healthcare equipment manufacturer considering in-house production of a critical component, a detailed cost-benefit analysis (CBA) offers insights necessary for an informed decision. This paper consolidates multiple scenarios derived from stakeholder inputs, analyzing their financial implications and strategic relevance.

Initially, it is essential to understand the baseline data and assumptions provided. The initial investment for the equipment is estimated at $700,000, with additional working capital needs of $30,000 annually (from Year 0 onward). The current annual expenditure on outsourcing the component is $1,500,000, and projected cash flow savings from bringing production in-house are approximately 16.67%, equivalent to $250,000 per year, inclusive of labor and overhead costs. A terminal value of $30,000 at the end of the equipment’s useful life is also assumed, considering the rapid technological advancements.

However, stakeholder perspectives introduce varied scenarios affecting the financial evaluation. Angela’s scenario maintains a 5-year project life, flat annual savings, and a 10% discount rate, with no terminal value, reflecting technological obsolescence considerations. Bob’s scenario introduces an optimistic growth in savings—10% annually over five years—along with the inclusion of a $30,000 terminal value, projecting potential revenue generation beyond cost savings. Conversely, Carl advocates for a higher discount rate (15%) to incorporate project risk and suggests a higher terminal value ($55,000), emphasizing uncertainty in technological and operational impacts.

Delilah presents an extended project duration of 7 years, with ongoing savings beyond the initial five-year horizon, and a lower terminal value ($20,000), aligning with the longer useful life and residual equipment value. Meanwhile, Edward proposes a less risky approach—distrusting the benefits of in-house production—by negotiating a reduced outsourcing cost of 3%, saving $45,000 annually over five years, with a lower discount rate (7%) due to minimal upfront investment. His scenario effectively becomes a cost reduction analysis rather than a capital project, inherently limiting certain financial metrics.

To evaluate each scenario comprehensively, key financial metrics such as Nominal Payback Period, Discounted Payback Period, Net Present Value (NPV), and Internal Rate of Return (IRR) are calculated. These metrics facilitate comparison by accounting for different assumptions about project lifespan, savings growth, risk, and residual value. For example, Angela’s scenario with a 5-year lifespan and flat savings yields a straightforward NPV calculation at 10%, while Bob’s dynamic savings growth scenario emphasizes the importance of projecting increased returns over time.

The analysis demonstrates that scenarios with higher growth assumptions, extended project durations, and lower discount rates generally produce favorable NPVs and quicker payback periods, making them attractive investments. Conversely, higher discount rates and shorter durations diminish project viability, exemplified by Carl’s high-risk scenario. Edward’s scenario, lacking an initial capital investment, primarily focuses on direct savings, leading to a simple NPV comparison, which still favors the cost reduction approach.

Strategically, while financial metrics underpin the decision, several non-financial factors bear significance. For instance, Delilah’s longer-term capability to improve quality and delivery suggests operational benefits that could outweigh strictly financial measures. Conversely, Edward’s emphasis on supplier negotiation highlights the importance of supply chain optimization without capital expenditure, reducing exposure to technological risks.

However, certain assumptions could render the project unattractive. If the actual savings are lower than projected, or if the useful life of the equipment shortens dramatically due to technological obsolescence, the project’s financial viability diminishes. A higher discount rate, reflecting increased risk perception, would also reduce the NPVs, potentially making alternatives more appealing. Moreover, if the terminal value is overestimated, subsequent depreciation of equipment could erode expected returns.

In conclusion, analyzing the various financial scenarios indicates that the most compelling case arises from a moderate combination of project duration, realistic savings growth, and manageable risk levels. The scenario assuming five years with steady savings and a 10% discount rate (Angela’s) provides a balanced outlook, though strategic considerations—such as quality improvement, supply stability, and potential revenue streams—should guide the final recommendation. Given the variability inherent in technological progress and operational risks, a cautious approach emphasizing scenario analysis will enhance decision robustness.

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