Spreadsheet Assignment 3
As she headed toward her boss’s office, Emily Hamilton, chief operating officer for the Aerocomp Corporation – a computer services firm that specialized in airborne support – wished she could
remember more of her training in financial theory that she had been exposed to in college.
Emily had just completed summarizing the financial aspects of four capital investment projects that were open
to Aerocomp during the coming year, and she was faced with the task of recommending which should be selected.
What concerned her was the knowledge that her boss, Kay Marsh, a “street smart”
chief executive, with no background in financial theory, would immediately favor the project that promised the highest gain in reported net income.
Emily knows that selecting projects purely on that
basis would be incorrect; but she was not sure of her ability to convince Kay, who tended to assume financiers thought up fancy methods just to show how smart they were.
As she prepared to enter Kay’s office, Emily pulled her summary sheets from her briefcase and quickly reviewed the details of the four projects, all of which she considered to be equally risky.
A. A proposal to add a jet to the company’s fleet.
The plane was only six years old and was considered a good buy at $300,000.
In return, the plane would bring over $600,000 in additional revenue
during the next five years with only about $56,000 in operating costs.
(See Table 1 for details)
B. A proposal to diversify into copy machines.
The franchise was to cost $700,000, which would be amortized over a 40-year period.
The new business was expected to generate over $1.4 million in
sales over the next five years, and over $800,000 in aftertax earnings.
(See Table 2 for details)
C. A proposal to buy a helicopter.
The machine was expensive and, counting additional training and licensing requirements, would cost $40,000 a year to operate.
However, the versatility that the
helicopter was expected to provide would generate over $1.5 million in additional revenue, and it would give the company access to a wider market as well.