Financial Analysis of Investment Proposals for Canada Hardware Inc.

This report, prepared for Canada Hardware Inc. by a senior analyst, evaluates two investment proposals: expanding an existing facility and converting stores into restaurants. The analysis includes calculating bond yields, identifying relevant and irrelevant costs, and projecting after-tax cash flows for each project. Financial metrics such as Net Present Value (NPV), Internal Rate of Return (IRR), Payback Period, Discounted Payback Period, and Profitability Index are used to assess the viability of each investment. The report recommends whether the company should undertake the investment, considering factors like risk, potential returns, and tax implications. Investment 1 involves expanding a facility, while investment 2 concerns converting stores into restaurants. The analysis provides detailed financial insights to guide decision-making.

Running head: ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
Name of the Student
Name of the University
Author Note

1
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
Executive Summary
This report contains an analysis of the relevant and irrelevant costs of the investment proposals
of Canada Hardware. It uses various financial tools like NPV, IRR and others and concludes
with a recommendation of the investment that the company should take up.

2
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
Table of Contents
Q3. Summary Narrative...............................................................................................................3
Description of Investment 1.........................................................................................................3
Description of Investment 2.........................................................................................................3
Time Horizons identified.............................................................................................................3
Relevant and Irrelevant Costs identified......................................................................................3
Q6. Evaluation of Two Investment Proposals.............................................................................3
Investment 1 Recommendation....................................................................................................3
Investment 2 Recommendation....................................................................................................4
References....................................................................................................................................5

3
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
Q3. Summary Narrative
Description of Investment 1
In the given case, there are two investment proposals which are to be evaluated and
selected. Investment 1 is related to expanding one of the existing facilities of the company and
not taking over a distribution company to meet the growing demand for its apparel. This also
includes the distribution of these manufactured products to its existing network of stores. This
facility used in manufacturing cost $7000000 to purchase 10 years ago. Due to this expansion,
CHI has an opportunity to nearly double its production in the near future. It will expand the
production by 75% in the first year and at an annual rate of 10% in the years following that. The
price of the products is measured at $30 which will increase at a rate of 2% in the coming years.
The material and labour will cost @ 23% and 25% of the amount of sales. Other costs involved
in this case will be the salaries of additional supervisors of $100000 and the insurance for the
equipment and facilities at $80000. Overhead costs excluding depreciation are estimated to cost
$500000 and wages are expected to increase with inflation. Additional trucks required for
delivery would cost $100000 each and an annual insurance of $100000. The variable costs are
expected to be at 15% of the incremental revenue. The expansion would cost an estimated
$9000000 while the production equipment would cost an estimated $1000000 for a time of 6
years.
Description of Investment 2
This investment proposal consists of turning several existing stores into restaurants for
which 15 restaurants have been selected. These stores were purchased eight years ago. The cost
of converting each store into a restaurant would cost $580000 with the CCA rate being
mentioned at 6%. This investment is expected to generate an annual after-tax cash flow of
$300000 while foregoing the revenue of $230000 previously being earned from the store. The
stores were purchased for an amount of $1000000 each eight years ago. The new project is
estimated to be invested for a period of 8 years.
Time Horizons identified
The time period allocated for investment 1 is a period of 6 years while the time horizon
for the funds invested in investment 2 has been allocated for a period of 8 years.

4
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
Relevant and Irrelevant Costs identified
Investment 1 relevant
costs
Investment 1
irrelevant
costs
Investment 2 relevant
costs
Investment 2
irrelevant costs
Initial Investment Cost of purchasing
the facility 10 years
ago
Cost of initial
investment
Cost of purchasing
the facilities 8 years
ago.
Cost of inflation Material and labour
costs of the preceding
years.
Opportunity cost i.e.
the revenue lost due
to converting the
store.
Material cost Capital conversion
costs
Labour Cost
Transportation
Insurance
Supervisor Salary
Other Overhead costs
Q6. Evaluation of Two Investment Proposals
Investment 1 Recommendation
Investment 1 is to be made for a period of 6 years. It’s payback period is for a time of
1.28 years while the discounted payback period is for a time of 1.35 years. The IRR of this
investment is measured at 82%, which is very high in general (Buettner & Wamser, 2015). This
means that the project will have to produce a return of 82% in order to recover the investment
that is being made by Canada Hardware. The tax shield provided is positive (Zwick & Mahon,
2017). The profitability index of this investment is measured at 5.76 which means that the
project will provide the investor with a return of 5 times to his investment. In this case, NPV is a
better option to use as the cash flows over the years are not constant and the existence of same

5
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
discount rate over the years is not always possible (Weber, 2014). Hence it can be said that this
investment is a highly risky one which should be taken up only if the company is able to bear the
possibility of the investment being a failure.
Investment 2 Recommendation
Investment 2 has a negative NPV and also has a profitability index of 0.8. This project is
not feasible when compared to project 1 and will serve the company with losses. Also, the tax
shield provided and the profitability of this project is lower than that of Investment 1. This
project should not be taken up by company 1.

6
ANALYSIS OF INVESTMENT PROPOSALS OF CANADA HARDWARE
References
Weber, T. A. (2014). On the (non-) equivalence of IRR and NPV. Journal of Mathematical
Economics, 52, 25-39.
Buettner, T., & Wamser, G. (2013). Internal debt and multinational profit shifting: Empirical
evidence from firm-level panel data. National Tax Journal, 66(1), 63.
Zwick, E., & Mahon, J. (2017). Tax policy and heterogeneous investment behavior. American
Economic Review, 107(1), 217-48.
Neumann, P. J., Cohen, J. T., & Weinstein, M. C. (2014). Updating cost-effectiveness—the
curious resilience of the $50,000-per-QALY threshold. New England Journal of
Medicine, 371(9), 796-797.