Memo Assignment #2

Instructions: The assignment should be a series of calculations and recommendations addressing the requested items. This will be done in a professional memo format with complete sentences that explain your process and include only essential supporting calculations (i.e., no need to explain every little detail on, for example, NPV calculations for Project X, just show that Project X's NPV isX) and incorporated tables. I would expect the memo to be no less than two full pages and no more than six pages. The goal is two-fold: proper calculations and recommendations AND the appropriate presentation and explanation of your recommendations.

Ford Allen, CEO of the Amstelveen Corporation, has some major decisions to make. Six division managers are clamoring for investment in projects totaling 31,000,000. Allen is working to fund them all, but currently only has 8,000,000 available for Amstelveen to invest.

Proposals(all amounts in thousands)
	Project	A	B	C	D	E	F
Initial Investment	1,000	2,000	8,000	5,000	5,000	10,000
Annual cash flows	Year 1	500	1,500	2,000	4,800	2,000	3,000
Year 2	1,000	1,000	2,000	1,500	3,000	2,000
Year 3	500	300	8,000	6,000	5,000	1,500
Year 4	1,000	500	2,000	-3,000	1,000	2,000
Year 5	1,500	200	2,500	-4,000	3,000	3,500

Amstelveen's cost of capital is 9%, it uses a payback period cut-off of 2 years, and it calculates depreciation on a straight-line basis with the assumption of a zero salvage value.

Allen has tasked you, an employee in the corporate controller's office, with several tasks.

First, if there are no capital constraints, identify each project as advisable or inadvisable to pursue. Calculate this using the three methods of calculating capital budgeting that we covered in class. If there are any contradictory recommendations (i.e., recommended under payback but not recommended under IRR), explain how this is possible and what you would recommend as the dominant criteria in this situation.

Second, give the recommended total that you suggest Amstelveen raise, in addition to the 8,000,000 it already has, in order to invest in your recommended projects.

Third, Allen wants a recommendation on which project(s) the company should pursue if it remains limited to 8,000,000. Make sure to clearly explain the basis (which is the dominant criteria and why) for your recommendation.

Note: you cannot recommend abandoning Project D when it becomes negative in Year 4.