Preview

FIN553 Penelope Case Group 2

Satisfactory Essays
Open Document
Open Document
612 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
FIN553 Penelope Case Group 2
FIN553 Advanced Coporate Finance
Case Study: Penelope's Personal Pocket Phones

Group 2
Brian Erber, Jaime Carreno, Wenliang Zhang, Xue Liu

(Introduction) Background info about the project.
In order to evaluate the NPV of the first-generation phone (project) ignoring the possibility of investing in the second-generation phone (project), we projected the free cash flows (FCF) of the first-generation phone through 2001 to 2006. The total FCF was calculated as EBIT plus deprecation and subtract any capital expenditures along with change in net working capital. With risk-free rate of 10%, comparable firms’ beta of 1.2, and market premium of 4%, the appropriate discount rate for the project was 14.8% using CAPM. Sum up each discounted cash flow, the NPV of the first-generation project was - $3,370,071. Since we got a negative NPV, we recommended that Penelope shouldn’t invest in the first-generation project alone.
The option for Penelope to make the follow-on investments can be treated as a call option. Therefore, we evaluated the expected value of the second-generation project by using Black-Scholes. If Penelope wanted to justify investing in the first-generation project by investing in the second-generation project, they would need the total APV equal or greater than zero, which means the sum of NPV of the first-generation project (- $3,370,071) and value of the call option to make the follow-on investment should be equal or greater than zero. The cost of second-generation project of $100 million was equivalent to the exercise price in Black-Scholes formula; its present value in 2001 was $68,301,346 (discounted at 10% risk-free rate). The value of the second-generation project was the asset price in Black-Scholes formula. Using solver function in excel, we calculated the value of the second-generation project by changing the value of the second-generation project to set APV equal to zero (or value of call option equal to $3,370,071). The
Continue Reading
View Writing Issues

You May Also Find These Documents Helpful

  • Powerful Essays

    Concordia Real Estate Inc Case Study: Analysis of the Investment Opportunity
    • 3248 Words
    • 13 Pages

    Concordia Real Estate Inc Case Study: Analysis of the Investment Opportunity

    The results of the analysis lend favourably towards accepting the investment project. First it is important to note that based on the after tax cost of borrowing and a risk premium of 3.75%, a discount rate of 8.89% was deemed appropriate for the project. The majority of the investment indicators used to value the project use discounted cash flows to determine the investment’s profitability. This technique allows for comparison amongst different investment opportunities available, as it provides the total return that is expected to be achieved over the project’s horizon in current dollar terms.…

    • 3248 Words
    • 13 Pages
    Powerful Essays
    Read More
  • Satisfactory Essays

    BGA1 Task 4
    • 343 Words
    • 2 Pages

    BGA1 Task 4

    Net present value (NPV) method is used to decide whether or not a company should take on a new project or acquisition. The formula for NPV is the difference between the present value of a project’s cash inflows and its cash outflows. To calculate the present values the future cash flows are discounted using the time value of money method. For the project to be accepted the NPV should be positive, because it means the return is greater than the required rate of return; or zero, because that means the return is equal to the required rate of return. However, if negative the project should be rejected, because its return is less than the required rate of return. This required rate of return is also referred to as the cost of capital.…

    • 343 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Better Essays

    ACCT614-1403A-02 Applied Managerial Accounting
    • 1228 Words
    • 4 Pages

    ACCT614-1403A-02 Applied Managerial Accounting

    The focus of EEC’s investment of the purchasing of the supplier is to cut down on the cost expenditures of the company. The primary board members and investors anticipate in the timeframe the fifth of to save financially in revenue $600,000 per annum this will accumulate $9 million in net in the timeframe of that 15 years. 14% of that investment and consumption cost will be attributed out of $9 million net, which adds up to sum of $3 million. The president of the company asked me to give an analysis in the possibilities foreseen in the investment what would be the Net Present Value, along with the Internal Rate of Return, and the payback of the investment.…

    • 1228 Words
    • 4 Pages
    Better Essays
    Read More
  • Satisfactory Essays

    week five for ops 571
    • 639 Words
    • 2 Pages

    week five for ops 571

    According to the project descriptions, $450,000 has been spent on the product and they average a total of $575,000 being spent in order to bring the product to the market. Even though the dollar amount spent in this project is high, the return on investment for this project is high; by the third year the product is forecasted to have a return of investments of $750,000. The product life of this project is forecasted to be 7 years. Because this product has not been used we would be the first company to launch the product to the market which would create an innovative style allowing our company to be the leader in the industry.…

    • 639 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Good Essays

    Coral Bay Hospital Case Summary
    • 495 Words
    • 2 Pages

    Coral Bay Hospital Case Summary

    This report utilizes the base case analysis, worse case analysis and best case analysis feeling these analyses are sufficient, while many analyses may be of interest, they could confuse the recommendations and strategic value of the project. In preparation the board would be told that calculating multiple NPVs for multiple inflationary rates for labor cost and supply cost would further confuse the issue. The information presented the NPV, IRR, MIRR and payback times would be calculated and discussed. Additionally, a break even point would be calculated. The break even point calculation included in fixed cost would…

    • 495 Words
    • 2 Pages
    Good Essays
    Read More
  • Good Essays

    FIN 3513 Case 1
    • 1988 Words
    • 6 Pages

    FIN 3513 Case 1

    In 2009, the total liabilities were 29.81% of the total assets, and the total shareholders’ equity was 70.91% of the total assets. In 2010, the total liabilities were 37.51%, and the total shareholders’ equity was 62.49% of the total asset. This indicates that Logitech is not a high leverage company, with a debt-to-equity ratio of 0.42 in 2009 and 0.60 in 2010. However, this is unusual for a technological…

    • 1988 Words
    • 6 Pages
    Good Essays
    Read More
  • Satisfactory Essays

    The Dallas Project
    • 346 Words
    • 2 Pages

    The Dallas Project

    3. The project is a slam-dunk for the corporation because they are yielding an internal rate of return of 80%. The NPV of the future cash flows is significantly larger than the purchase costs of the assets.…

    • 346 Words
    • 2 Pages
    Satisfactory Essays
    Read More
  • Good Essays

    Nucor Memo
    • 905 Words
    • 4 Pages

    Nucor Memo

    Top management at Nucor Corporation has determined its own internal investment criterion in determining whether to accept or reject a new investment project. Currently, the company judges the potential success of a project by its ability to achieve a 25 percent return on assets after 5 years. This ratio measures how efficiently Nucor’s assets are able to generate revenue. Based off current market growth rate predictions, an investment in the CSP process will result in a return on assets of 29.33 percent. (Exhibit 1) This number exceeds the initial investment qualification by a promising margin of about 4 percent. Therefore, based on the internal criterion, this CSP process is a relatively safe and profitable investment.…

    • 905 Words
    • 4 Pages
    Good Essays
    Read More
  • Good Essays

    Boeing Case
    • 789 Words
    • 3 Pages

    Boeing Case

    When it comes to investing in the 7E7 project the investors have three major options. The first of these options is to invest in the project with a short term gain in mind. Secondly the shareholder can invest expecting the project to pay off in the long-term. And lastly the prospective shareholder can choose to not invest in the project as a whole. In order to evaluate the profitability of the 7E7 project we are going to calculate the WACC of the project and then compare it to the stated IRR of 15.7%. While this calculation of IRR is subject to other risks such as the amount of units sold expected, we are going to assume 2,500 units will be sold annually over the first 20 years. It is also assumed that over the next 20 years world economies will grow by 3.2% annually and the relationship between air travel and GDP will continue which is growing at 5.1% annually. The calculation of the WACC is determined by using the following equation.…

    • 789 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Super Project HBS
    • 882 Words
    • 4 Pages

    Super Project HBS

    To analyze the attractiveness of the investment in the Super Project, we must use the estimated cash flows calculated to derive a decision based on a particular capital budgeting technique. Within this report we have considered the Accounting Rate of Return, the Payback Period, the Internal Rate of Return (IRR) and the Net Present Value (NPV) techniques. The accounting rate of return is defined as the average after-tax profit divided by the average invested capital. The average invested capital for the Super Project is simply the average of the $200,000.00 initially required and the Total Working Funds (line 20) for each period forecasted in Exhibit 6. The average after-tax profit is simply the average of the Net Profit (line 37) for each…

    • 882 Words
    • 4 Pages
    Good Essays
    Read More
  • Good Essays

    Harris Seafood Case
    • 635 Words
    • 3 Pages

    Harris Seafood Case

    The valuation of the firm starts in year 1980. The 48% marginal tax rate was given. In order to finance the project we have decided to issue $7,000,000 worth of 12-year maturity Industrial Revenue bonds to fund the investment in property, plant and equipment. We have decided to use discounted cash flow analysis as our valuation method. From two inflation choices provided, we picked an inflation of 0% as we strongly believe that using 11% inflation would add an additional uncertainty to our analysis, exposing our project to even larger assumption of costs and revenue. As for our cost of capital we assume the rate of 16% that is the cost of financing debt. For the depreciation and amortization we have used the numbers given in Exhibit 6, along with pounds of shrimp sold and price per pound.…

    • 635 Words
    • 3 Pages
    Good Essays
    Read More
  • Good Essays

    Worldwide Paper Company Case Write Up
    • 1117 Words
    • 5 Pages

    Worldwide Paper Company Case Write Up

    In the case of Worldwide Paper Company we performed calculations to decide whether they should accept a new project or not. We calculated their net income and their cash flows for this project (See Table 1.6 and 1.5). We computed WPC’s weighted average cost of capital as 9.87%. We then used the cash flows to calculate the company’s NPV. We first calculated the NPV by using the 15% discount rate; by using that number we calculated a negative NPV of $2,162,760. We determined that the discount rate of 15% was out dated and insufficient. To calculate a more accurate NPV for the project, we decided to use the rate of 9.87% that we computed. Using this number we got the NPV of $577,069. With the NPV of $577,069 our conclusion is to accept this project as long as everything stays as it currently is. We recommend that they evaluate themselves at least yearly as things may change from year to year.…

    • 1117 Words
    • 5 Pages
    Good Essays
    Read More
  • Good Essays

    The Investment Detective
    • 439 Words
    • 2 Pages

    The Investment Detective

    This case presents the cash flows of eight unidentified investments, all of equal initial investment size. The student’s task is to rank the projects. The first objective of the case is to examine critically the principal capital-budgeting criteria. A second objective is to consider the problem that arises when net present value (NPV) and internal rate of return (IRR) disagree as to the ranking of two mutually exclusive projects. Finally, the case is a vehicle for introducing the problem created by attempting to rank projects of unequal life and the solution to that difficulty criterion.…

    • 439 Words
    • 2 Pages
    Good Essays
    Read More
  • Powerful Essays

    Pepsico Changchun Joint Venture: Capital Expenditure Analysis
    • 928 Words
    • 4 Pages

    Pepsico Changchun Joint Venture: Capital Expenditure Analysis

    The NPV and IRR were calculated both with and without NOBPT. Furthermore the replicated NPV was incorrect and as such was corrected using a revised NPV function. The Excel NPV function does not correspond to the finance use of the term NPV. To correct this NPV should be calculated as the present value of future cash flows minus the initial payment, the initial payment is later added outside the parenthesis of the function.…

    • 928 Words
    • 4 Pages
    Powerful Essays
    Read More
  • Satisfactory Essays

    CITIC TOWER II
    • 596 Words
    • 2 Pages

    CITIC TOWER II

    The NPV model underlying assumptions didn’t fully capture the upward potential of the gains that might be acquired from developing the project if the economic environment was to improve. However, the downside risk is currently viable as per the NPV is the negative zone. Therefore, the ultimate payoff pattern to CPL is to engage in an option that will allow the company to improve its understanding of the potential losses or profits and it will enable the company to capture upside potential profits and tame its losses to the value of the option. The mentioned option has the same payoff of a European Call Option as shown in the above diagram.…

    • 596 Words
    • 2 Pages
    Satisfactory Essays
    Read More

Related Topics