Assignment #1:
Caribbean Intern Café
Date: November 14, 2012
1. There are many issues that Mr. Grant should consider before proceeding with the CIC. There are several things that Mr. Grant should examine before even looking at the projections given to him. Total capital is $2,250,000, $1,000,000 in investments and $1,250,000 in the form of a long-term loan. $1,573,000 is immediately spent leaving $677,000. If he has no customers, he can afford to remain open for 3 months. As well, they are not attractive to individuals who seek to use the Internet for longer periods of time and the customer base that they are attempting to attract is the more affluent and educated of the population. They are also the most likely to either
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Therefore, in the first three years Mr. Grant should expect to make a significant profit in these years for the project to be worthwhile. Projected net profits (losses) for each scenario are shown in Table 2.
Scenario | Year 1 ($) | Year 2 ($) | Year 3 ($) | Total ($) | Optimistic | 3,147,600 | 4,720,600 | 4,720,600 | 12,588,800 | Realistic | (596,400) | 976,600 | 976,600 | 1,356,800 | Pessimistic | (2,324,400) | (751,400) | (751,400) | (3,827,200) |
Table 2 shows the net profit (loss) for the first 3 years based on each scenario. All start-up costs are paid for in full in the first year only.
Based on this these scenarios Mr. Grant would have a very difficult decision to make. Firstly, the net profit does not take into account the $500,000 investments that were made by both Mr. Grant and JTL. Secondly, the terms of the long-term loan are not made clear nor did the negotiations include an amortization schedule. As well, a long-term plan has not been made based on expected increases in private Internet usage. Finally, the probability of each scenario being realized is a very important tool to determine the expected value of Mr. Grant’s decision. If each scenario is equally likely to occur than Mr. Grant will have an expected
1. Using the historical data as a guide, construct a pro forma (forecasted) profit and loss statement
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The relatively well posed project with promises of great future pay offs must be examined closely nevertheless to determine its true profitability. As such, the Super Project’s NPV must be calculated, however before we proceed we must acknowledge the relevant cash flows. The project incurred an expense of testing the market. This expense, however, must not be included in our cash flow analysis because it can be considered a sunk cost. This expense is required for ‘taking a temperature’ of the market and will not be recovered. Other sources of cash flow include:
2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value.
Decision Making Area 3:Investment Decisions * Table of Articles * Summary of Articles * Observations * Conclusion
3. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?
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If we look at the financial summary of M.L.I we can calculate how much Winkler can bid for this company. We can calculate Net Present Value, Indicial Rate of Return and Payback period for this project. If we take last year and estimated after tax Income as a projection and investment of $2 million we can calculate:
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