The Dilemma at Day Pro

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

To make the most informed decision the IRRs and payback periods of the projects should be compared in conjunction with the NPVs of the two projects. The NPV analysis of the two projects under consideration indicates that the MMDC Project is the better of the two projects.

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.

7) See Table 1 NPV=42,318.71 IRR = 14% MIRR = 12% Payback period= 2.93 years. Yes the project should be undertaken.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

1. Evaluate the terms of the proposed $900 million financing from the perspective of both parties. How would you calculate the return to investors in this transaction? If you need more information, what information do you need?

5.000,00 $ 7.500 151.250 20 35.000,00 $ 12.500 321.250 26 $ 58,20 $ 110.000,00 4.000 333.500 83 115,38

Financial risks include the short payback period. A 3-year payback period would not allow Hansson the opportunity to breakeven. With a negative NPV in the first 3 years Hansson’s decision to invest in the project would be based on his ability to negotiate a longer contract time. The Net Present Value (NPV) would have to be examined in tandem with the other non-financial variables.

In my opinion the company should reject the project as the ARR is much less than expected and the payback period is nearly as long as the maximum payback period which could put company to danger.

5) Consider two mutually exclusive R&D projects that AMD, a chip manufacturer, is considering. Assume the corporate discount rate is 15 per cent and the minimum acceptable IRR is 25 per cent.

A target payback period will be set by the company and the proposals that recover their initial cost within this time will be acceptable. If a comparison is made between two or more options then the choice will be project with the fastest payback.

3. The NPV method is better because it shows the size of the project so you can see how much value a project has not just a percentage. You could have a higher percentage but a much lower value and you would still go for the lower percentage.

(500,000) 1,215,153 1,308,558 1,379,154 248,357 257,664 262,899 $ 668,334 $ 719,707 $ 758,535 $ 136,596 50,000 134,271 46,500 98,000 120,000 50,000 635,367.52 32,966.63 6,191.88 26,774.75 73,275 (426,725) (432,153) 141,715 146,478 46,500 98,000 120,000 552,693.02 167,013.88 31,369.01 135,644.87 182,145 (244,580) (275,993) 144,595 146,478 46,500 98,000 120,000 555,572.33 202,962.18 38,120.92

| Fiscal Year Ended December 31, 2003 $1,500 250 400 450 200 20 600 250 (475) 70 (50) 85

Mutually exclusive projects are another situation for which NPV must extend its approach. In such projects, the chosen project is usually one which results in the greatest positive NPV because this will produce the greatest addition to shareholders’ wealth. In the case of mutually exclusive investments, ranking becomes crucial as only