Capital Investment Assignment Example | Topics and Well Written Essays - 1750 words

Capital Investment - Assignment Example Even though after the democratic elections conducted in the year 2005, the country has been advised to be a safer destination for capital investments, there have been apprehensions about the stability of the country and the chances of the conflicts arising again which may hinder the sustained growth of the company's operations in the country. Apart from the political risk, there is the issue of Company's Social Responsibility and the related costs and ethical values that need consideration before taking any decision on investing in Medco Republic. In addition the report focuses on the foreign exchange risk in dealing with the currency of Medco Republic. The objective of this report therefore is to consider the soundness of the proposed capital investment from the angles of financial feasibility, country risk of Medco Republic and the foreign exchange risk in undertaking transactions in the currency of Medco Republic as against the British Pounds as the investments the commitment of substantially larger sums by the Company to be recouped over a longer period. The analysis is based on a review of the net cash flows from the project using the recognized capital budgeting evaluation methods of Net Present Value (NPV) and Internal Rate of Return (IRR), taking the weighted average cost of capital of the Company of 15% as the hurdle rate and the rate for discounting the present value of future cash flows from the project. Financial Feasibility The financial feasibility of any capital investment proposal can be judged based on the ability of the project to enhance the shareholders' wealth by contributing positive net cash inflows from the proposed investments. Just any other domestic capital project is being evaluated, for the international investments can also be evaluated by calculating the 'Net Present Value' (NPV) future cash flows expected out of the project. The NPV of the project depends on the initial investment or initial cash flow, expected future cash flows and the cost of capital. Based on the comparison of the NPV of the future cash flows with the proposed capital investment the feasibility of the project can be established. While working out the NPV the effect of the factors like Sales creation (additional sales), cannibalization (loss of sales), opportunity cost, transfer pricing and fees and royalties on the future cash flows should be taken into account. The Internal Rate of Return (IRR) is the other criter ion that needs to be carefully looked into while deciding on the capital investment. In the case of the proposed capital investment proposals the NPV and IRR from the projects have been worked out and exhibited in the Appendix. From the NPV calculations it is observed that the project has a negative net present value which implies that the project is not acceptable. The internal rate of return (IRR) is also much lower than that of the weighted cost of capital of the company. As against the cost of capital of 15% the IRR from the project works out to 5%. This also indicates that the proposed investment is unviable. Even though the Company can set off the tax payments in the country of Medco Republic against its income tax