Honest Vino Case Summary

Finally, in order to complete a more accurate comparison between the two projects, we utilized the EANPV as the deciding factor. Under current accepted financial practice, NPV is generally considered the most accurate method of predicting the performance of a potential project. The duration of the projects is different, one lasts four years and one lasts six years. To account for the variation in time frames for the projects and to further refine our selection we calculated the EANPV to compare performance on a yearly basis.

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.

The third scenario was ignoring the option to invest in the second-generation project and selling the equipment in year 2. We evaluated this option as a put option. First, we calculated the probabilities for going up and down based on the assumption of a risk neutral word. As a result, the probability of going upward is calculated as 0.3375 and downward probability is 0.6625. In order to determine the present value of all the sequence cash flow at the end of year 2, we calculated the upside change rate and downside change rate as 64.87% and -39.35%, respectfully. The next step is to analyze the option value by using the “Binomial Tree” method. In order to determine the present value of all the subsequence cash flow at the end of year 2, we calculated the cash flow at each node on the tree, until 2006. We discounted all the cash flow at the risk free rate at 10%. The End of Year NPV of all the subsequence cash flow at Year 2 is calculated as $7,571,752, and the selling price of the equipment at end of 2 is $4,000,000, which is the salvage value. We found the NPV of selling the machine at end of Year 2 to be -$2,951,861 as of Year 0, which is negative. The APV of the project after adding the option turned out to be -$6,321,932. This negative APV suggest that the

Wine retailer More Vino LTD is located in Port of Spain, Trinidad. It operates four subunits: wholesaling and distribution, a retail store, a bar, a restaurant, and a delivery service, making it a successful multilevel business.

By using the 7.2% after tax rate and assuming the equipment will be sold at the beginning of the 5th year for its book value, if Agro-Chem bought the equipment the company would achieve a project NPV of ($1,043,500.23). In contrast, if Agro-Chem decided to lease the equipment with the same assumptions they would obtain a project NPV of ($1,030,205). Given these assumptions and based off our calculated NPV we recommend that Agro-Chem lease the equipment rather than buy because of the $13,295.23 savings. This $13,295.23 savings is the NAL.

AE = Profitability and/or decision analysis is applied appropriately in the analysis of at least three strategic alternatives and at least one other relevant performance management concept or tool is applied appropriately in the quantitative analyses;

a. What is each project's single-cycle NPV? Now apply the replacement chain approach and then repeat the analysis using the equivalent annual annuity approach. Which project should be chosen, S or L? Why?

To do this we had to calculate the reinvestment rate w/o synergies and the return on capital (RoC).

The time disparity problem and the conflicting rankings that accompany it result from the differing reinvestment assumptions made by the net present value and internal rate of return decision criteria. The net present value criterion assumes that cash flows over the life of the project can be reinvested at the required rate of return; the internal rate of return implicitly assumes that the cash flows over the life of the project can be reinvested at the internal rate of return.

The discount cash flow (DFC) is a financial valuation model that discerns present value (PV) by projecting and discounting future cash flows (CF). The three constituent parts of DCF methodology are cash flows, discount rate, and terminal value. Given that real estate pro forma analysis is performed over specified holding period, a terminal or remaining value must be established for the property to complete the valuation. The Gordon Growth Method is one of the approaches used to calculate terminal value over the useful life of a property based on “an infinite series of numbers growing at a constant rate” (Gordon Growth Model Definition, n.d.).

The ARR (Accounting rate of return) is the only method that compare the measure of profit over the life of a project to the amount of capital that must be invested to earn that profit. Once the ARR has been calculated, it is compared to the firm’s target return normally the organisation’s

2. Compute the NPV of both projects. Which would you recommend? What if they are not mutually exclusive?

This technique assist in the decision making process because once the internal rate of return is determined, the desired investment can easily be decided. Taking the cash outflow and inflow from each alternative and the desired rate of return will offer the best comparison as which investment will present a return favorable.

While this method utilizes the concept of cash flow and uses the initial investment as the denominator, discounted cash flow is still not used, and we suspect this method is geared more towards the comfort level of OL managers, while WD managers would continue to utilize the NPV and IRR figures.

In particular, small changes in inputs can result in large changes in the value of a company, given the need to project cash-flow to infinity.  James Montier argues that, "while the algebra of DCF is simple, neat and compelling, the implementation becomes a  minefield of problems". He cites, in particular, problems with  estimating cash flows and estimating discount rates. Despite the issues, DCF analysis is very widely used and is perhaps the primary valuation tool amongst the financial analyst community.