Get BUS704 Task 1 Project Evaluation Case Study Help
BUS704 Task 1: Project Evaluation Case Study
Due Date: Sunday 03/04/2022 by 11.59 pm (AEST)
Product: Excel-based feasibility study with short answer questions
Assessment Weight: 50% 2,000-word Case Study
Solace Machinery Pty Ltd manufactures construction equipment such as drop saws, routing machines and wielders. They have been in business for over 35 years and have established a large client base. Their major clients include training institutions, hire businesses and large residential builders. In January of 2022 Solace surveyed six of their major clients to identify what areas they could improve upon in relation to meeting their clients’ needs.
The feedback indicated three key areas for improvement:
- Quality of products (Solace Machinery currently has old production machines);
- Ease of placing and tracing orders (Solace Machinery’s IT system is five years old); and
- Delivery by Solace Machinery is not as timely as it was initially due the company not increasing its delivery fleet to match sales growth.
Solace has around $1,450,000 to invest to undertake one of the following projects:
- Commissioning a new production machine. Initial cost is $1,450,000 and an additional maintenance cost of $500,000 in year 2 of the project. It is expected this machine will improve sales at a rate of $500,000 per year over a five-year period. Solace has assessed this project as moderately risky and have therefore decided a risk rate of 10% would be appropriate.
- Upgrade Solace’s IT infrastructure at an initial cost of $620,000 with annual maintenance costs initially in year 1 of $70,000 (which decreases by $10,000 per year) over the project’s life of four years. It is expected sales will increase initially by $210,000 per year increasing at a rate of 15% per year. This project is assessed as a low risk so a rate of risk of 8% has been assigned to this project.
- Purchase two new delivery trucks for $1,160,000. Annual maintenance costs are estimated as $60,000 for the four-year life of this project. At the end of four years, it is expected the vehicles could be sold for $700,000. While estimated sales increase is the same as the IT project this project is considered riskier and so the project has been assigned a risk rate of 12.5%
- Which project would provide the best return based on Net Present Value (NPV)? Which project would provide the best return based on the Internal Rate of Return (IRR)? Explain in some detail why one project should be selected over another.
- What other aspects (besides financial) should be taken into consideration?
- In determining the estimates of increased sales, expenses, and risk, what should Solace Machinery take into consideration? Show how this could impact the NPV.
- If you were to use other project evaluation methods, such as Accounting Rate of Return OR the non-discount Payback method, would you recommend a different project?
- What issues would you need to consider should you use a different method of deciding, on a financial basis, determining which project to recommend?
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