Financial Analysis of Proposals

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MEMO To: CEO, ECGM Ltd. From: External Consultant, Awesome Consulting Corp, LLC. May 14, 2012 Re: Financial Analysis of Proposals. Executive Summary The two proposals that were sent to the office of External Consultant on May 11, 2012 were subject to financial analysis using a number of different techniques. It has been determined that neither of these projects should be undertaken by ECGM Ltd. Both projects presented will, if undertaken, erode shareholder value. The details that lead to this conclusion, including the different assumptions and analysis using the methodology that ECGM provided are presented in this memo. Signed, External Consultant. i) The payback method of capital budgeting is the time period where the cash inflows from the project pay back the initial cash outlay. The formula for payback period, when the cash flows are stable is: Cost of Project = _________________ Annual Cash Inflows Source: Investopedia (2012)Â Using the payback method, Proposal A has a payback period of 6 years and 3 months, as calculated using the formula: 20,000 / 3200 = 6.25 years The payback formula cannot be used with Proposal B because that project has no stable annual cash flows. The "dumb" way of calculating payback must be used, simply adding the figures until it becomes positive, and then figuring out where the point where the project's cash inflows have equaled its outflows is. Proposal B has a payback period of five years and 262 days. Proposal B has the
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