Valuing Capital Investment Projects
Harvard Business School
9-298-092
Rev. December 4, 1998
Valuing Capital Investment Projects
1.
Growth Enterprises, Inc. (GEI) has $40 million that it can invest in any or all of the four capital investment projects, which have cash flows as shown in Table 1 below.
Table 1
Comparison of Project Cash Flows* ($ thousands)
Year of Cash Flow
Project
A.
B.
C.
D.
Type of
Cash Flow
Year 0
Investment
Revenue
Operating expenses
($10,000)
Investment
Revenue
Operating expenses
($10,000)
Investment
Revenue
Operating expenses
($10,000)
Investment
Revenue
Operating expenses
($10,000)
Year 1
Year 2
Year 3
$21,000
11,000
$15,000
5,833
$17,000
7,833
$10,000
5,555
$11,000
4,889
$30,000
15,555
$30,000
15,555
$10,000
5,555
$5,000
2,222
*
All revenues and operating expenses can be considered cash items.
Each of these projects is considered to be of equivalent risk. The investment will be depreciated to zero on a straight-line basis for tax purposes. GEI’s marginal corporate tax
This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Problem 1 appears in the case, “Introduction to Investment Evaluation Techniques” (HBS case no. 285-115) by Professor Dwight B. Crane and was revised for inclusion in this case. Problems 3 and 4 appear in the case,
“Investment Analysis and Lockheed Tri Star”(HBS case no. 291-031) by Professor Michael E. Edleson and were also revised for inclusion in this case.
Copyright © 1997 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School.
1
9-298-092
Rev. December 4, 1998
Valuing Capital Investment Projects
1.
Growth Enterprises, Inc. (GEI) has $40 million that it can invest in any or all of the four capital investment projects, which have cash flows as shown in Table 1 below.
Table 1
Comparison of Project Cash Flows* ($ thousands)
Year of Cash Flow
Project
A.
B.
C.
D.
Type of
Cash Flow
Year 0
Investment
Revenue
Operating expenses
($10,000)
Investment
Revenue
Operating expenses
($10,000)
Investment
Revenue
Operating expenses
($10,000)
Investment
Revenue
Operating expenses
($10,000)
Year 1
Year 2
Year 3
$21,000
11,000
$15,000
5,833
$17,000
7,833
$10,000
5,555
$11,000
4,889
$30,000
15,555
$30,000
15,555
$10,000
5,555
$5,000
2,222
*
All revenues and operating expenses can be considered cash items.
Each of these projects is considered to be of equivalent risk. The investment will be depreciated to zero on a straight-line basis for tax purposes. GEI’s marginal corporate tax
This case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Problem 1 appears in the case, “Introduction to Investment Evaluation Techniques” (HBS case no. 285-115) by Professor Dwight B. Crane and was revised for inclusion in this case. Problems 3 and 4 appear in the case,
“Investment Analysis and Lockheed Tri Star”(HBS case no. 291-031) by Professor Michael E. Edleson and were also revised for inclusion in this case.
Copyright © 1997 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685 or write Harvard Business School Publishing, Boston, MA 02163. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permi ssion of Harvard Business School.
1