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Business & Marketing
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English (U.S.)
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Topic:

Galaxy Satellite Co.

Essay Instructions:

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
21%
B
$9,320,000
$9,000,000
25%
C
$1,060,000
$1,000,000
24%
D
$7,350,000
$7,000,000
23%
1.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.)
2.Use the IRR approach to select the best group of projects. (Note that the discount rate or the cost of capital is 20%.)
3.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.

Essay Sample Content Preview:

GALAXY SATELLITE CO: NPV, IRR and capital rationing
Name
Course
Instructor
Date
A] Choice of project based on NPV basis and capital rationing
The NPV based on the difference of the cash inflows and cash outflows for the 4 projects
A=$3,050,000-$3,000,000=$50,000
B=$9,320,000-$9,000,000=$320,000
C=$1,060,000-$1,000,000=$60,000
D=$7,350, 000-$7,000,000=$350,000
The best group of investment projects is C & D with an NPV of $ 410,000 (60,000+ 350,000) and an initial investment of $8,000,000 (1,000,000+ 7,000,000).
B] Choice of project based on IRR basis
PROJECTIRRA21%B25%C24%D23%
The Internal Rate of Return (IRR) is the rate at which the cash inflows are equal to the cash outflows. The decision criteria is to choose a project whose IRR is more than the cost of capital (minimum required rate of return), which was 20%. All the four projec...
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