WMBA 6070 Week 5 Capital Project Memo Example

Memorandum

To: Owners, Brightwater Crane and Rigging

From: Finance Manager

Date: October 19, 2026

Re: Investment decision on the proposed 250-ton all-terrain crane

Decision

Brightwater should buy the 250-ton all-terrain crane. Discounted at the firm's 10.5 percent cost of capital from the Week 4 memo, its cash flows over twelve years are worth about $478,000 more than they cost. Two supporting measures agree: the crane returns roughly 14.4 percent a year on the money committed, and the investment is recovered in about six years. The project's main risk is utilization. If the crane works fewer than about 1,250 billable hours a year, instead of the 1,450 assumed, it no longer earns its cost of capital.

The Cash Flows

The crane costs $2.4 million, paid under the four-payment schedule chosen in Week 1, plus about $60,000 of working capital for parts and receivables. The analysis treats the full price as spent at delivery, since the payment schedule is a financing choice and should not be mixed into the investment decision (Brealey et al., 2023).

Table 1

Assumptions Behind the Cash Flows

Figures are composite estimates for a composite firm.

Each year the crane earns about $870,000 in rental revenue and costs about $419,000 to run. After tax and the tax savings from depreciation, it produces about $457,000 of cash in year one, falling to about $356,000 a year once depreciation ends after year six, with about $613,000 more in year twelve from the after-tax salvage value and the return of working capital.

Results

Table 2

Measures at the Base Case

Composite figures.

The net present value is the measure that decides the case, because it shows the dollar value the project adds at the firm's own cost of capital. The 14.4 percent return confirms a margin of about four points over the hurdle. Payback is long, as it usually is for heavy equipment, and it says more about how long the firm's cash is committed than about the project's value. The profitability index of about 1.19, the present value of the inflows divided by the initial outlay (Ross et al., 2022), means each dollar invested returns about $1.19 in present value.

Sensitivity

Table 3

Net Present Value When One Assumption Changes

Each row changes one assumption and holds the others at the base case; composite figures.

Utilization and the rental rate matter most. The project breaks even at about 1,250 billable hours, about 14 percent below the base case, or at a rate near $540, about 10 percent below the current card. The discount rate matters less: even at 13 percent, the rate proposed in Week 4 for the riskier wind venture, the crane adds value. Salvage value barely matters, because it arrives twelve years from now.

Why the Risk Is Acceptable

Utilization below 1,250 hours would require a sharp downturn in commercial construction in the firm's region. In its worst recent year, Brightwater's large cranes still averaged about 1,300 hours. In the survey by Graham and Harvey (2001), most finance chiefs leaned on discounted measures for big decisions and often looked at payback too; here every one of those measures favors the crane. The memo nonetheless recommends one protection: before delivery, the sales team should line up commitments for at least 600 of the first year's hours from the firm's two largest contractor customers.

Commitment

Fund the purchase at $2.4 million under the four-payment schedule, with delivery in the spring, and review the crane's billable hours at the end of its first full season.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2023). Principles of corporate finance (14th ed.). McGraw Hill.

Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7

Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. D. (2022). Corporate finance (13th ed.). McGraw Hill.