Case Description FROMA is a small business that provides soft goods (straps and pack systems) to military buyers. They are considering several different investments and have asked you for your help in evaluating the impact, as their CFO is part-time and does not have the capacity to advise the owner on this matter. Due to constraints on management oversight, only one of the investments can be made. The owner has had conversations with various sources of capital for the different investments. The investment alternatives are listed in the table below, along with the funding source(s) and the returns that each funding source expects. FROMA’s part-time CFO has provided you with the following information: · Weighted Average Cost of Capital (WACC) is assumed to be 10%. · A recent balance sheet (see supplemental information section) and the most recent profit and loss statement (see supplemental information section), and the current five year profit and loss forecast (which assumes no investment project is pursued). · Cash flow assumptions of each investment alternative (see supplemental information section). · Any debt that FROMA has or takes on is coupon debt – there will be no principal repayment requirements, only annual interest. · All existing and future fixed assets have an assumed depreciable life of 10 years and all existing assets have been purchased within the last two years. page1image2221325792 1 Requirements Write a report addressing the content requirements listed below. Your report should be properly formatted into sections that are congruent with the content requirements. This is a professional business report, not a book report or creative writing assignment. Feel free to use your own style, but the report should be professional and well-written. Submission requirements This assignment should be prepared as a business report with schedules. Grading will be based upon: • Satisfaction of requirements listed below. • Quality of analysis, discussion, and estimation methods. • Quality of report organization and layout. • Proper grammar and spelling; style and flow; sentence construction; concise but complete. • Editing – good writing is rewriting! Graphics and other visualizations are not an absolute requirement (unless otherwise specified), but your grade will be positively affected by the use of effective visualizations. Make certain you appropriately show relevant calculations. If you find it difficult to present calculations using software, you may handwrite your calculations and include those calculations in your pdf. Utilizing an appendix is an excellent way to provide supplemental information (such as detailed calculations) in a report. Another option to show calculations is to cut/paste an excel schedule as an image into Microsoft Word, with written commentary as appropriate. Tier 1 requirements (maximum grade of B+): Write a report outlining your recommendations for investment. Include the following in your report: 1. Evaluate and rank each investment alternative using NPV, IRR, and payback, using the CFO-provided WACC as the discount/hurdle rate. You should include calculations for each alternative. 2. Which investment would you recommend? Why? 3. Prepare a five year profit and loss statement forecast that incorporates the effect of your recommended investment alternative choice (ie, use the existing forecast and modify it for the effects of the investment). Use a 10 year depreciable life for any new fixed assets. Use 25% for the income tax rate (ignore other taxes) and be sure to incorporate any interest costs as a result of your alternative choice. 4. Prepare a balance sheet forecast for the next five years using static (as a ratio of revenue) working capital metrics and incorporating the future balance sheet effects of your investment project choice. For T1, you may ignore the cash account, but you should forecast all other lines of the balance sheet, including all equity accounts, debt accounts, and non-cash assets. 5. Discuss the qualitative costs and benefits of the different sources of capital. Why might the owner forgo the hard math of capital budgeting and choose one project (or one source of funds) over another? FROMA’s Current Balance Sheet Figure 1: FROMA Balance Sheet page3image2179320512 FROMA’s Current and Forecasted Profit and Loss Statement Figure 2: FROMA Profit and Loss Actuals and Forecast page4image2220633952 Cash Flow details for each investment alternative Figure 3: FROMA Investment Alternatives Cash Flows page5image2220397680