The investment project
- From Scenario 1, evaluate the technology proposed by Shawn Paschal. What is your recommendation on the adoption of this technology? Explain your reasoning.
Shawn paschal’s advanced technology for use in the green fuel production expected that the first cash flow would be 200,000 dollars when it is received two years from today. Again, the subsequent yearly cash flows are calculated to grow at 4.5 percent in permanence after that. Moreover, the calculations determined that the value one period before the first payment would be roughly 178,571.43 dollars and today’s value is 2,380,952.38 dollars. Based on this data, Paschal’s technology would be indeed a wise investment for King Fisher Aviation. I anticipate that this technology may assist in the long term growth of the company.
- From Scenario 1, what do you recommend to King Fisher regarding changing their 30 day collection period? Explain your reasoning.
Typically, a short collection period implies timely collection as well as better management of receivables. In this case, a longer collection duration may negatively impact the ability to pay short term debt of the business in the eyes of investors and analysts (Ross, et al., 2017). Consequently, it seems the collection duration of thirty days is appropriate for King Fisher Aviation, and also no changes needed. I think that changing the collection duration may not only create confusion for suppliers but customers too. Again, if they already possess accounts contracted at the thirty–day collection duration, then it may also be challenging to alter in the mid-contract.
- From Scenario 2, what are your recommendations on the investment project? Explain your reasoning.
From scenario 2, the investment project gives us three differing initial cost probabilities. Moreover, the payback duration for these investment projects ranges from 2.53 to 3.38 periods. Besides, the investment amount appears significantly small, and also, the payback duration appears comparatively short. Hence, based on the numbers, I would advise King Fisher to undertake the investment project.
- From Scenario 2, what are your recommendations for investment in the new technology?
By examining data from scenario 2, it seems that keeping the old machine has a negative internal rate. Again, the negative number shows that it would be good to invest in the new technology and not to depend on old technology. Lastly, the new technology has a constructive internal rate of return.
- From Scenario 3, evaluate King Fisher’s target capital structure. What are your recommendations? Consider the impact of taxes and explain your reasoning.
Mainly, the optimal capital structure refers to a mix of equity and debt that maximizes a company’s return on capital, thus maximizing its value. Typically, in a perfect market, a company’s capital should not have any impact on its value. Besides, a firm’s insecurities typically include equity and debt thus, one should calculate the cost of equity as well as the cost of debt to assess a firm’s cost of equity. Due to the tax advantages on debt issuance, it will be much cheaper issuing debt as compared to issuing new equity. The main reason behind this is that adding debt maximizes the default risk. In addition to that, a company must pay the interest rate to borrow capital. Hence, the management must identify either the capital structure where the cost of capital is lessened or optimal mix of financing so that the company’s value can be maximized.