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Running head: PROJECT 4 1Project 4 MBA 620James OehlerkingUniversity of Maryland University College
PROJECT 4 2Project 4 MBA 620MCS has developed the following material to better predict the expected net cash flow for McCormick & Company’s factory acquisition in Largo, Maryland. From this material McCormick will be able to better weigh the pros and cons of this new business endeavor and whether it is a venture worth taking on. This material was developed using our best projections, however they are only estimates. To mitigate this uncertainty, risk margins are factored into our calculations to help ensure underestimates do not occur. Financing & InvestingThe first issue addressed is the value of the physical property. This factory has an investment value of $868,000 for McCormick and is listed at only $750,000 presently. Acquisition, with a positive net present value of $118,000 would be a good opportunity for the company to exploit. The new Largo factory once it begins operations, is expected to generate $600,000 of revenue in the first year according to McCormick’s projections. After deducting all expenses, depreciation and taxes, expected net income will be $135,000. The next analysis of new factory acquisition is whether the annual net income of company operations over five years, will surpass the $750,000 price of the facility. To do this MCS takes the future value of net incomes and coverts them to present value. As was mentionedpreviously with these projections, to mitigate risk, the values must not overestimate expected net income. While the company’s existing operations are given a risk buffer of 7%, operations in this new facility will pose a greater risk; therefore, McCormick assigns a 20% discount rate adequate risk mitigation. From this information MCS has concluded the following: