Case Study Investment Proposals

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Canada Hardware Case Study
Investment Proposals
Tony Stark, CEO of CHI, wants you to
evaluate two investment proposals
that the company is considering:
An investment in manufacturing
and distribution that involves the
expansion of a facility and
purchase of additional delivery
trucks; and
The development of restaurants
into several of its existing stores.
Mr. Stark reminds you that only
relevant costs and revenues should
be considered. “Relevant costs have
to be occurring in the future.”
explained Mr. Stark. “And have to
differ from the status quo. For
example, if we choose to expand our
facilities, it is only the incremental
revenue and costs related to the
expansion that should be considered.
We also need to take into account the
opportunity cost associated with the
alternatives. For example, for the
restaurant conversion, we need to
factor in the lost sales”,
More details on each investment
proposal are included below. Mr. Stark
wants you to recommend if CHI
should invest in one, both, or none of
the investment proposals.
Required Return
Mr. Stark wants you to use the
weighted average bond yield for your
required return. The total market
value of debt CHI is expected to have
going into this investment is $3.5B,
which includes the additional $1.5B to
be taken on that is not included in the
current financial statements. The
current outstanding debt has an
interest rate of 5%, while the new
debt’s interest rate is now averted to
26 in

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