Investment Opportunities

Memo

To: President of ExTrans

From: Nina James

Date: 10/5/2012

Re: Investment Opportunities

Upon thorough evaluation of the four investment opportunities previously presented, it is in ExTrans' best interest to add an additional Bentley limousine to the firm's fleet. The four variables used to evaluate each opportunity were net present value, profitability index, internal rate of return, and payback period. Proposal A requires only $300,000 of the $800,000 allocated in the capital budget. It adds $39,971 in additional market value to ExTrans. Due to budget constraints, Proposal A is the only investment that should be pursued. The purchase of three additional moving trucks would also provide additional market value to ExTrans to the tune of $20,609, but would require a much larger initial investment for less return. Combining these two proposals would require $10,000 more than the allowed budget. This $10,000 shortfall in budget for both proposals prevents the company from achieving an additional $18,735 in market value. On a positive note, it prevents ExTrans from becoming over-leveraged in an attempt to grow too rapidly. The $500,000 in capital saved by only investing in Proposal A will provide the ability to invest in other safe alternatives.

The proposal to purchase and operate a VIP lounge at the airport presents the possibility of adding the most value for ExTrans (Represented by C (a) in the following chart). Using NPV as the only tool to evaluate investments creates a false representation of efficiency for each option. Proposal C (a) represents the non-delayed launch and only has a 40% chance of occurring. However, a one year delay represented by C (b) shows a negative NPV which has a 60% chance of occurring. The greater chance of delay does not justify investing in proposal C.

Another positive factor of Proposal A is it has the highest profitability index. Considering our budgeting