Pathrite Systems Analysis

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ESI Analysis Report ESI Analysis Report Monster computer corporation | September 3, 2006 Monster computer corporation | September 3, 2006 pathrite systems analysis Frances Wu, Inola zeng, JIAN QIN, mOHAMODE zATMAH pathrite systems analysis Frances Wu, Inola zeng, JIAN QIN, mOHAMODE zATMAH It is recommended that EIS purchase the Pathrite System, since the expected value of the net present value of the project is positive, no matter we consider the CCA rate or not. 1. Weighted Average Cost of Capital calculation and analysis The overall method used to calculate the expected value of the net present value of the project is to first calculate the real weighted average cost of capital of the firm, use the…show more content…
The detail calculation refers exhibit 1. Scenario 1 which resembles the steady state has a nominal cash flow of 2.5 million. The NPV of scenario 1 is 118,245.21 with an IRR of 8.59%. In scenario 2 the expected cash flow is (2,500,000*1.3) with an NPV of 2,202,737.72 and IRR 16.44%. Scenario 3 has an expected cash flow of (2,500,000*0.85) with an NPV of -960,507.80 and IRR of 4.25%. Taking the three scenarios into account, an expected value of NPV that incorporates the probabilities of each scenario needs to be considered. Expected value of NPV = NPV1*probability 1 + NPV2*probability 2 + NPV3 * probability3 = NPV (normal) * 0.7 + NPV (best) * 0.2 + NPV (worst) * 0.1 = 118,245.21* 0.7 + 2,202,737.72 * 0.2 + (-960,507.80) * 0.1 = 427268.42 Expected value of IRR = IRR1 * probability 1 + IRR2 * probability 2 + IRR3 * probability 3 = IRR (normal) * 0.7 + IRR (best) * 0.2 + IRR (worst) * 0.1 = 8.59% * 0.7 +16.44% * 0.2 +4.25% * 0.1 = 9.724% Conclusion 1 Overall, because Expected value of NPV > 0 and IRR > WACC, both results are consisted and strongly recommend the purchase of the Pathrite System. After the calculation, the result of NPV which by using nominal cash flow and nominal WACC is the same as which using real cash flow and real WACC.
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