Write a 250 word discussion post regarding the information below.
As McCormick decides whether they will invest in an additional factory to keep up with demand, the company remains uncertain if the investment will yield worthwhile returns. “That is where they need us to provide them with a risk and return evaluation,” Frank says. “Risk is the financial liability a company takes in a given investment in consideration of a potential return on the investment.”
Frank tasks you with recommending a method for raising sufficient capital. “McCormick & Company has been paying dividends to its shareholders for several years now,” he says. “The company has given us some data and would like us to recommend ways they can further leverage their financing activities. The company is interested in potentially issuing more stock or purchasing bonds to raise additional capital for the construction of the new factory. I will need you to answer a few questions about the company’s stock prices and minimum acceptable rate of return. Your answers will help me make a recommendation to McCormick.”
Frank has asked you to meet with your colleagues and discuss how risk and returns will influence McCormick’s investment decision. Complete the following tasks:
- Discuss whether McCormick & Company should invest in building a new factory in Largo, Maryland. Give credit to any sources you use to support your statements.
- Discuss how understanding risk and returns will impact this decision. Give credit to any sources you use to support your statements.
- Later in the week, after you are back in your office, you have a follow-up discussion with your MCS colleagues in an effort to summarize the key lessons from your discussion on risk and returns at the meeting. Respond to your colleagues’ original discussion posts and give credit to any sources you use to support your statements
Also, please respond with 150 words on the discussion post shown below.
1. McCormick and Company is contemplating on whether to undertake the project with an initial investment of 364 million in building a new factory in Largo, Maryland and purchasing equipment for the new plant. Based on the calculations in excel on Net Present Value, the NPV is $381 million. A positive net present value indicates that the projected earnings generated by a project or investment – in present dollars – exceeds the anticipated costs, also in present dollars. It is assumed that an investment with a positive NPV will be profitable, and an investment with a negative NPV will result in a net loss (Kenton, 2019). In this instance, McCormick and company should proceed in building a new factory. Another financial factor to consider is the IRR (Internal Rate of Return), the excel spreadsheet shows an IRR of 18.81%. This is important to consider because It is important for a business to look at the IRR as they plan for future growth and expansion. Basically, the higher a project’s internal rate of return, the more desirable it is to undertake. IRR is uniform for investments of varying types and, as such, IRR can be used to rank multiple prospective projects on a relatively even basis. Assuming the costs of investment are equal among the various projects, the project with the highest IRR would probably be considered the best and be undertaken first (Hayes, 2019).
The risk-return tradeoff states that the potential return rises with an increase in risk. Using this principle, individuals associate low levels of uncertainty with low potential returns, and high levels of uncertainty or risk with high potential returns. According to the risk-return tradeoff, invested money can render higher profits only if the investor will accept a higher possibility of losses (Chin, 2019).
References
Chin, J. (2019, August 20). What is Risk Return Trade Off? Retrieved from Investopedia: https://www.investopedia.com/terms/r/riskreturntra…
Hayes, A. (2019, June 25). Internal Rate of Return – IRR. Retrieved from Investopedia: https://www.investopedia.com/terms/i/irr.asp
Kenton, W. (2019, June 25). Net Present Value. Retrieved from Investopedia: https://www.investopedia.com/terms/n/npv.asp
2. McCormick & Company Building Investment
Investing in a factory building is always one decision corporations will have to make and it is usually based off why a new factory is needed and if it will be profitable for a company to expand. In the case of McCormick & Company, it has its calculations set to recoup cost involved of setting up at year 6, with a return of 18.38% and an initial rate of 7%. Based on this information, it is profitable for the company to expand as its return exceeds the initial rate of 7% and after year 5 it yields profit from the new factory. I recommend McCormick & Company build the new factory.
Understanding risk and returns
In investing, risk and return are highly correlated. Increased potential returns on investment usually go hand-in-hand with increased risk. For investments with equity risk, the risk is best measured by looking at the variance of actual returns around the expected return. On investments with default risk, the risk is measured by the likelihood that the promised cash flows might not be delivered. (“Risk and Return – How to Analyze Risks and Returns in Investing”, 2019) Since every corporation wants to be sure it can yield a return and also looks at risks involved. In this case, the results and yield outweigh the risk and it will be an investors dream to push for the factory based off the provided figures
References
Risk and Return – How to Analyze Risks and Returns in Investing. (2019). Retrieved 22 August 2019, from https://corporatefinanceinstitute.com/resources/kn…
Lastly, please update my excel sheet with the following information.
For the financing tab, question 1, add 350 year 0 which brings the final answer to -20.13. For question 2, similarly, the final answer is -3.15. In the valuation tab, find sell, option and exercise numerics and sum. Question 4 needs revised. On the annuities tab, review and revise questions 4 and 5.
