New Heritage Doll
New Heritage Doll
1. Compute the Free Cash Flows for the years 2010 to 2020 for both projects
See excel File attached.
Assumptions:
* We assumed the required working capital in table 2 and 3 is the amount required in 2010, for further years we computed the WCR based on the ratio’s of minimum cash balance, number of days sales outstanding, inventory turnover and days payable outstanding (deducting the depreciation as instructed)
* We assumed the SG&A and fixed production costs were project specific and therefore included them in the FCF analysis
2. Compute the NPV of both projects. Which would you recommend? What if they are not mutually exclusive?
NPVMMDC = 7,150
NPVDYOD = 7,298
Based solely on the NPV analysis we would suggest to implement the DYOD project as it has a higher NPV.
If both projects weren’t mutually exclusive, we would suggest implementing both as both have a positive NPV.
3. Compute IRR and payback period for both projects. Based on each criterion, which project would you recommend? If this differs from NPV analysis, explain the deviation?
For MMDC:
IRR = 23,99%*
Payback period = 8 years (assuming the cash flows occur at year end, as instructed)
For DYOD:
IRR = 18,33%*
Payback period = 11 years (assuming the cash flows in 2021 is indeed CF2020*1,03)
*For the IRR analysis we drafted a NPV sensitivity graph in order to make sure that there are not 2 possible values for IRR. These graphs are to be found in the excel file attached.
Based on these criteria we would recommend investing in the MMDC project as IRR is higher and payback period is shorter.
These analyses differ from the NPV analysis as these methods penalize projects with high initial investments and positive cash flows that occur later in time.
4. Describe possible risks and advantages that one might need to take into account but are not considered by NPV analysis?
Risks:
* The allocation of a limited amount of capital available within the company, there may be an
1. Compute the Free Cash Flows for the years 2010 to 2020 for both projects
See excel File attached.
Assumptions:
* We assumed the required working capital in table 2 and 3 is the amount required in 2010, for further years we computed the WCR based on the ratio’s of minimum cash balance, number of days sales outstanding, inventory turnover and days payable outstanding (deducting the depreciation as instructed)
* We assumed the SG&A and fixed production costs were project specific and therefore included them in the FCF analysis
2. Compute the NPV of both projects. Which would you recommend? What if they are not mutually exclusive?
NPVMMDC = 7,150
NPVDYOD = 7,298
Based solely on the NPV analysis we would suggest to implement the DYOD project as it has a higher NPV.
If both projects weren’t mutually exclusive, we would suggest implementing both as both have a positive NPV.
3. Compute IRR and payback period for both projects. Based on each criterion, which project would you recommend? If this differs from NPV analysis, explain the deviation?
For MMDC:
IRR = 23,99%*
Payback period = 8 years (assuming the cash flows occur at year end, as instructed)
For DYOD:
IRR = 18,33%*
Payback period = 11 years (assuming the cash flows in 2021 is indeed CF2020*1,03)
*For the IRR analysis we drafted a NPV sensitivity graph in order to make sure that there are not 2 possible values for IRR. These graphs are to be found in the excel file attached.
Based on these criteria we would recommend investing in the MMDC project as IRR is higher and payback period is shorter.
These analyses differ from the NPV analysis as these methods penalize projects with high initial investments and positive cash flows that occur later in time.
4. Describe possible risks and advantages that one might need to take into account but are not considered by NPV analysis?
Risks:
* The allocation of a limited amount of capital available within the company, there may be an