Your Discussion should be a minimum of 250 words in length and not more than 450 words. Please include a word count. Following the APA standard, use references and in-text citations for the textbook and any other sources.
For this week’s Discussion:
Submit a written paper which is 2-3 pages in length, exclusive of the reference page. The Abstract is not required or needed. Papers should be double spaced in Times New Roman font which is no greater than 12 points in size. The paper should cite at least one source independent of the textbook.
In this paper, please discuss the following case study. In doing so, explain your approach to the problem, support your approach with references, and execute your approach. Provide an answer to the case study’s questions with a recommendation.
You and your lifelong friend are partners together in the promotional materials business. That is, when marketing firms and their clients begin advertising or public relations campaigns, they come to your company to obtain the materials and products that would support the ad campaign. Examples of the materials and products you supply are printed posters, signs, T-shirts with printed logos, key chains, and other such items. You supply these items by procuring them from other sources or in some cases you manufacture them using various equipment in a warehouse you use near the center of the city. Your company’s name is WePROMOTE.
You and your business partner are planning the next major project for your company. The project is a significant step in the growth of your firm in that the project will generate cash inflows into the firm for many years into the future. However, there will be a large investment of funds required by the firm to launch the project. The planning is in its preliminary stages where the numbers and other data are gross estimates. Despite the “fuzzy numbers”, you and your partner still need to decide whether the project will be worth pursuing.
The following is some of the estimated data you have:
You trust your partner’s instincts and agree to start analyzing the feasibility of the project. The first step is to perform net present value (NPV) calculations for the project using your partner’s estimates and then using your estimates.
Requirements of the paper:
Papers will be assessed using the following criteria:
This assignment will be assessed using the Unit 2 Written Assignment rubric provided.
The Portfolio entry should be a minimum of 250 words and not more than 750 words. Use APA citations and references if you use ideas from the readings or other sources.
This assignment will be assessed using the Portfolio rubric (provided).
Unit 2: Cash Flows and Discount Cash Flow Analysis
By the end of this Unit, you will be able to:
What is the net present value (NPV) method?
The NPV method of capital budgeting relies on the concept of discounted cash flows. When a company is evaluating a capital budgeting decision, the discounted cash flow concept allows a company to calculate the estimated future cash flow(s) value in terms of today’s dollar value. This results in offsetting the impact of inflation on those future cash flows.
The process for calculating the NPV for a project is to complete those calculations that put the value of the future cash flows on a current value basis. To complete the NPV calculation, the company has to assume the cost of capital, which is the interest rate that the firm will experience for the project. The decision criteria are that if the NPV of the project’s cash flow is positive, then the project can be accepted. What the NPV methodology allows a company to do is evaluate if the project’s return is a positive, neutral, or negative investment against a set rate for the cost of capital. When two projects are mutually exclusive, the NPV methodology can be relatively easy to incorporate and use.
There is an inherent value placed on money that is based on time. A certain sum of money held today is inherently more valuable than the same amount promised to be delivered a year from now. The skills acquired during this unit will also extend to the activities we will cover in Unit 3. Important methods and techniques that assess cash flow situations have their basis in understanding the time value of money and with specific emphasis on calculating present values. Other techniques, such as pay-back, accounting rate of return, NPV, and internal rate of return, are also commonly used measures to evaluate business proposals. The primary emphasis in this course will be the use of NPV’s.
The NPV method of capital budget relies on the discounted cash flow (DCF) concept. DCF methods incorporate the time value of money. This means $1,000 received today is worth more than $1,000 to be received in 1 year. The $1,000 to be received in one year is worth less because of the missed opportunity from not having the money today.
When a firm is evaluating a capital budgeting decision, the discounted cash flow method allows a firm to calculate the value of the estimated future cash flows in terms of today’s dollar value (to offset the impact of inflation on future cash flows). The discounted cash is computed by dividing by one, plus the discount rate to the power of the number of years that need to be discounted.
The firm has to assume a cost of capital (also called the discount rate, hurdle rate, or rate of return), which is the interest rate that the firm will experience for the project (for use in the NPV calculation). The NPV methodology allows a company to evaluate if the project’s return is a positive, neutral, or negative investment against a set rate for the cost of capital. The decision criterion is that if the NPV of the project’s cash flow is positive, then the project can be accepted.
All course textbooks are accessible through the Syllabus or through the course’s “Textbook” page. Any additional, non-textbook Reading Assignments will provide text access/location information below.
Read Chapter 6 – Pages 72-94