Question

In this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s questions with a recommendation.

You and your lifelong friend are partners together in the promotional materials business. That is, when marketing firms and their clients begin advertising or public relations campaigns, they come to your company to obtain the materials and products that would support the ad campaign. Examples of the materials and products you supply are printed posters, signs, T-shirts with printed logos, key chains, and other such items. You supply these items by procuring them from other sources or in some cases you manufacture them using various equipment in a warehouse you use near the center of the city. Your company’s name is WePROMOTE.

You and your business partner are planning the next major project for your company. The project is a significant step in the growth of your firm in that the project will generate cash inflows into the firm for many years into the future. However, there will be a large investment of funds required by the firm to launch the project. The planning is in its preliminary stages where the numbers and other data are gross estimates. Despite the “fuzzy numbers”, you and your partner still need to decide whether the project will be worth pursuing.

The following is some of the estimated data you have:

• You both decided to finance the project using your own funds.
• The cost of the equipment will be $80,000 and this cost is incurred prior to any cash is received by the project.
• The expected cash inflows are the most variable of the estimates. Your partner is convinced that the firm will receive $14,000 annually for 7 years. You have your doubts. You think it is more reasonable that there will be cash inflows of $14,000 in year 1, then inflows of $16,000 from years 2-4, and then inflows of $17,000 for years 5-7.
• You both agree that after 7 years, the equipment will stop working and can be sold for its parts for about $5,000.
• You both consider a discount rate of 7% but remain open to other future possibilities.

You trust your partner’s instincts and agree to start analyzing the feasibility of the project. The first step is to perform net present value (NPV) calculations for the project using your partner’s estimates and then using your estimates.

Requirements of the paper:

• Perform the two NPV calculations and provide a narrative of how you calculated both computations and why. Your answer must be justified.
• Present your calculated answers in schedule format (a table) along with your narrative. Microsoft Excel is also recommended for calculating and creating a table (your schedule).
• Then provide a summary conclusion on whether you should continue to pursue this business opportunity.
• Finally, assuming your partner remains unconvinced of your conclusion, present relevant points of your analysis that you believe are compelling and persuasive in supporting your position.

Papers will be assessed using the following criteria:

• Accurate NPV calculations are provided
• A narrative that fully explains how NPVs were calculated and why is included
• A clear, logical summary and conclusion is given
• A compelling and persuasive analysis in supporting your position

Answer 1

	AMOUNT IN $
PARTICULARS	YEAR 0	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5	YEAR 6	YEAR 7	TOTAL
COST OF EQUIPMENT	-80000								-80000
		14000	14000	14000	14000	14000	14000	14000
PV FACTOR 7%	1	0.93	0.87	0.82	0.76	0.71	0.67	0.62
1 ST YEAR 1/(1+.07) AND NEXT YEAR
( PRIVIOUS YEAR FACTOR/(1+.07)		13084.11215	12228.14	11428.17	10680.53	9981.807	9328.791	8718.496	75450.05162
SCRAP VALUE AT 7 YEAR END								5000
PV FACTOR								3113.749	3113.748709
TOTAL VALUE OF CASH INFLOW									78563.80033
NPV									-1436.199667
As per the above the npv shows negative and on the basis of this data the project is not feasible.
	AMOUNT IN $
PARTICULARS	YEAR 0	YEAR 1	YEAR 2	YEAR 3	YEAR 4	YEAR 5	YEAR 6	YEAR 7	TOTAL
COST OF EQUIPMENT	-80000								-80000
		14000	16000	16000	16000	17000	17000	17000
PV FACTOR 7%	1	0.93	0.87	0.82	0.76	0.71	0.67	0.62
1 ST YEAR 1/(1+.07) AND NEXT YEAR
( PRIVIOUS YEAR FACTOR/(1+.07)		13084.11215	13975.02	13060.77	12206.32	12120.77	11327.82	10586.75	86361.54969
SCRAP VALUE AT 7 YEAR END								5000
PV FACTOR								3113.749	3113.748709
TOTAL VALUE OF CASH INFLOW									89475.2984
NPV									9475.298402
RETURN ON INVESTMENT									11.84%
But as per our calculation the NPV of the project is positive and shows a contribution of 9475 . That is an yield of 11.84%
May be some changes will happened regarding cash inflow, the assumption fixed cash inflow of $14000 is not a feasible situation , because
every project has a life cycle of introduction, growth, retardation, the cash flow will incrase a littile higher than introduction stage
May be some redutcion in the final stage, here the equipment will salvaged in year 7 but it is not mentioned that the product also outdatde in that year
Similarly tax effect on depreciation also not considered , that also may show have some savings part in the workings
WE also considered inflation in the currenecy
So as per my openion we should choose the project.