The Real Green It Machine Capital Investment Decision And Sensitivity Analysis

I do not think it is proper. Since hurdle rate is the key factor to determine whether we should accept a project, it is concerned with a specific investment opportunity belonging to a division. As we can see in Table 1, each of Midland`s divisions had its own target debt ratio. Those

This view implies that a single hurdle rate may deprive an under profitable division of investments in order to channel more funds into a more profitable division. While this is sound logic, certain situation exist where projects will go unfunded that do create value to the company.

At the new WACC of 19%, the home appliance and agricultural machinery projects are valued based on their inherent levels of risk. The beta of the industry average home appliance project is 0.95, whereas the beta for the industry average agricultural machine project is calculated as 0.88. CAPM was then employed to find the cost of capital of each project. The cost of capital for the home appliance and agricultural machinery projects were found to be 10.4% and 9.92%, respectively (Appendix B). This analysis allows Star Company to allocate funds to projects that create returns greater than the industry cost of capital for each specific project.

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

In 2014, Hewlett Packard’s (HP’s) headquarters in Palo Alto, California partnered with SolarCity, a clean renewable energy solar provider, to outfit their headquarters with over 4,000 solar panels (Canales, 2014, para. 1). HP, a 75-year plus veteran of international technologies, understands the importance of creating and investing in sustainable solutions throughout its value chain. HP states: “We set bold targets to lead the IT sector. We are committed to sourcing 50% renewable electricity for our operations by 2025 and reducing operational greenhouse gas (GHG) emissions by 25% compared to 2015,” (“Living Progress,” 2017, para. 5). This commitment is not limited by HP to their products and services, but extends to, literally, their work environment. A small, but significant step to demonstrating this belief, is their project of installing solar panels over the heads of their top decision makers. “… [The] 1 megawatt system… is expected to offset more than 20 percent of HP’s current power usage onsite… [the] installation is expected to help HP reduce its utility power costs by approximately one million dollars over the next two decades,” (Canales, 2014, para. 1). To a company that earned a net income of 3.1 million in 2016 (“Cash Flow,” 2017) one

The Go Green Initiative WBS dictionary as shown in Chart 2, contains information pertaining to each work package. It is important that the project team review the dictionary for accuracy as the project progresses.

These centers contain an exorbitant amount of high-tech equipment and they require a substantial amount of capital investment to build. Having a data center open up in a specific area creates the possibility of more job opportunities in areas such as construction, power supply, high-tech support just to name a few. According to Data Center Dynamics, data centers support local and global business, and they are also capable of raising money, and state and local governments have always wanted global manufacturers in their

Hurdle rates, the weighted cost of capital that projected cash flows must exceed for initiatives to be considered, vary within Marriott Corporations due to their unique industry risk levels and capital structures. They use this number to determine which projects to accept, to adjust the rate at which the firm grows and as a measure for compensation within each business area, and as incentive compensation.

a. What hurdle rates would be assigned to projects in the three risk categories for the company

Bruce Frandsen is currently employed at Equinix, Inc which owns and operates over 100 data centers worldwide. Companies choose Equinix as a partner for offsite data center needs due to their state-of-the-art carrier-neutral colocation space and carrier-dense interconnection capabilities. He works with the indirect procurement team to help manage energy procurement and sustainability activities across our global footprint. In that capacity they are responsible for delivery of cost effective, efficient and reliable energy while constantly striving to have their actions be as sustainable as possible in the process.

Although, it is true that lower hurdle rates would translate into high growth projects, but including it in Manager’s compensation plan might lead to agency problem where managers may try to manipulate the hurdle rates in order to get the projects through and make money.

The use of an accounting rate of return also underscores a project 's true future profitability because returns are calculated from accounting statements that list items at book or historical values and are, thus, backward-looking. According to the ARR, cash flows are positive due to the way the return has been tabulated with regard to returns on funds employed. The Payback Period technique also reflects that the project is positive and that initial expenses will be retrieved in approximately 7 years. However, the Payback method treats all cash flows as if they are received in the same period, i.e. cash flows in period 2 are treated the same as cash flows received in period 8. Clearly, it ignores the time value of money and is not the best method employed. Conversely, the IRR and NPV methods reflect that The Super Project is unattractive. IRR calculated is less then the 10% cost of capital (tax tabulated was 48%). NPV calculations were also negative. We accept the NPV method as the optimal capital budgeting technique and use its outcome to provide the overall evidence for our final decision on The Super Project. In this case IRR provided the same rejection result; therefore, it too proved its usefulness. Despite that, IRR is not the most favorable method because it can provide false results in the case where multiple negative

Therefore, projects with expected return below 7.02% should be rejected if we only recommend a single and solitary hurdle rate. If doing so, we would ignore the difference between business line and probably accept projects with too higher risk relative to its comparable or reject projects with appropriate risk in its business.

If the IRR is less than the capital then that project should be rejected because it is not very feasible. If the Internal Rate of Return is larger than the capital required for the project, it should be accepted while if the IRR is just equal to the capital then the project could be considered because it is at the very least earning its cost of capital and should therefore be accepted at the margin.

The following paper analyzes a project from financial perspectives using the capital budgeting techniques like Net Present Value (NPV) and Internal Rate of Return (IRR).