Question

The company I am writing on is Nordstrom Inc and its expansion into a foreign country. This is the question: a. How would your projected financial performance change if sales fall 20% short of or are 20% higher than your base assumption? What does your analysis of these two scenarios imply for the proposed investment? Justify your response. b. What do the net present value, internal rate of return, and payback values from your base scenario and the sales variation scenarios above imply for the proposed investment? Be sure to explain how the time value of money affects your calculations and analysis.

Answer 1

Answer (a) If sales fall 20% short of or are 20% higher than your base assumption Then the projected financial information be changed as if there is a short fall of sale it may leads to change in our profitability our profitability gets decreased due to the short fall of sale Even there is a possibility our organisation is gose to a loss even in place of earning profit And if there is a increment in sales @ 20% then this may leads to increse in our profit capability or can increase EPS or return percentage on the proposed investment. Many time increment in sale may also leads to decrese in expense due to the proper utilisation of the expenses made.

Answer (b) In case of increment in sale :- The NPV of the project gets incresed and as the Sale increased so our cash inflows also gets increased as we know the increse in cash flow will leads to Decrese in internal rate of return i.e we say IRR Which is also better and as our amount of Cash inflows are increased this may leads to decrease in the payback period and we already know Payback period is lower the better

And In case of decrease in sale :- The NPV may also be turned to negative NPV which shows that we are not able to earn or receive the required rate of return or we say expected rate of return.And also decrese in sale may gets increased the payback period which is also not good to our project proposed

The time value of money affects our calculation and analysis by that due to increase or decrease in sale our projected earning will reduce that may get reduced the ecpected rate of return so there is a change in discount factors which may leads to change in it