School of Business & Economics

Master of Business Administration

BUSN-6020 - Corporate Finance (Winter 2015) Case Study Assignment 2: Sun View Valley Corporation (SVVC)

Prepared for:

Dr. Raymond Cox

Contents

Executive Summary 2

Question 1 – Methods Used 3

Payback Method 3

Discounted Payback 3

ARR Method (AAR, ROI) 4

Profitability Index (PI) or Benefit / Cost Ratio 4

Internal Rate of Return (IRR) 5

Modified Internal Rate of Return (MIRR) 5

Equivalent Annual Annuity 5

Question 2 - Sensitivity Analysis 6 o Selling Price 7 o Variable Cost 7 o Fixed Cost 7 o Investment Cost 7 o Net Working Capital 7 o Discount Rate 7

Question 3 - If the abandonment value is $9 million 8

Question 4 - Should SVVC make this investment? 8
*…show more content…*

It is our recommendation that SVVC should execute on the investment in the Venus Vinos Project.

To further support the decision to move forward on the project we conducted a sensitivity analysis which shows the projected estimates are heavily reliant on selling price and net working capital remaining unchanged.

Our attempts to mitigate forecasting risk have been significantly lessened because of the number discounted cash flow methods we have employed in our analysis. The scope of the project does not take into consideration technological improvements or human resource associated risk. There are also no external economic considerations made for the purposes of this project. SVVC is considering the VVP solely as a mutually exclusive option with no other alternatives. No capital rationing has been considered in this project and this project has been analyzed with the Stand Alone Principle in mind.

Question 1 – Methods Used to evaluate the investment using the payback, discounted payback, ARR, NPV, PI, IRR, MIRR and equivalent annual annuity methods.

When we evaluate the project using all the methods as outlined below, the picture for SVVC potential investment in VVP becomes clearer. By using multiple methods for the project, we are assessing the project from many financial perspectives to mitigate the potential for error related to application of just one DCF. The differences in

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