Evaluation of a New Project for McCormick & Company

Executive Summary (at least 1.5 pages)
Purpose of Report: This report is prepared for McCormick & Company, to help them in taking decision
as to whether they should develop the new project or not. This project involves initial investment to
build a new plant and purchase equipment. This report highlights the positive and negative aspects of
doing the project by using capital budgeting techniques.
Methods: For evaluation of the project, the NPV and IRR methods are used. These methods are part of
capital budgeting techniques.
The NPV method is known as Net Present Value method. Under this method, the cash flows over the life
of the projects are computed and their present value is compared with the initial investment to find out
that whether the project is beneficial for the company or not. If the net present value of all the cash
inflows is greater than the initial cash outflows than the company should accept the project and if the
inflows are lesser than the outflow than the project should be rejected as it reflects loss in the project.
The other method used for analyzing the project is IRR or internal rate of return method. Under this
method, a discount rate is calculated at which the NPV of all the cash flows of the project becomes zero.
So, any project whose IRR is greater than the minimum acceptable return (which is generally weighted
average cost of capital) should be accepted as it shows that the project is profitable.
The both methods are quite similar for determining the profitability of the project. The difference
between the two lies on the discount rate. Under NPV the discount rate is WACC whereas under IRR the
discount rate is computed.
Findings and Conclusions:- The conclusions under the two methods is as below:
NPV Method – This method says that if NPV is positive, project should be accepted and if NPV is
negative, project should be rejected. The NPV of the underlying project is $99,371,179. Since, the NPV is
positive hence the company should accept the project as it is profitable.
IRR Method – This method says that if the IRR of the project is more than the discount rate (WACC) of
the project, project should be accepted and vice versa. The IRR of the project is 92.53% whereas the
weighted average cost of capital of the project is 9.24%. Since the IRR is greater than the WACC, hence,
the company should accept the project.
The results under both methods are positive, hence, the company should accept the project.