Asset valuation 4244
1) The alternative that would be best for the company to choose is the second project. After using the replacement chain because the projects do not have the same life the NPV gave us a clear conclusion. Even though this problem is cost based and not based on revenue you would still take the NPV project that has the lowest NPV or associated cost. Project 2 actually had positive free cash flow for the years that were not a reinvestment or replacement chain year.
2) After analysis of the firm and manufacturing the container I have calculated that the price to be charged for each of the 28000 containers is 42 dollars. This would be the break even point from where the present value of the free cash flows is divided by the number of containers needed sold. Inflation has an effect on the rise in price due to ...view middle of the document...
This could be tapping a new market and cost efficiency. Cost of goods sold is also important coming in at 75 percent of revenues and SG&A coming in at 5% of revenues. A 40 percent tax rate and no salvage value for depreciated assets is another relative cash flow.
2) The projects source of value would be the money that it saves in operations and increase its revenues greatly. This project would eliminate the need to purchase shortwood from an outside supplier and create the opportunity to sell it to the open market. This value will take some time to generate and come at the cost of a huge investment. If the investment is not profitable then the consequences could be large. With that being said this looks like a stable project will revenues increasing from 4 million in 2007 to 10 million later in 2009 and 2010.
3) World wide paper was worried that they were using a discount rate that was out dated. To solve this problem in my calculation I used the 10-year treasury because the project in my opinion will either succeed or fail by that time period. The rate chosen was 4.6%. The beta in year 2006 was 1.1 and is an appropriate indicator of the companies risk. Although from our knowledge of future events expected to take place the beta may be higher due to the financial issues in the 20072008 2009 financial crisis. For those reasons I chose a beta of 1.4. The market premium over the history of the market was 6% and is a good measure to use in this equation. The discount rate that should be used after solving the math is 13%.
4) Due to the analysis of this situation I would say that the discount rate is appropriate and if the company can tap into the market to increase revenues over time and keep their relative costs low I would say this investment would be a success. Inflation only hurts income a little with the rise of labor costs and using a building that is already depreciated will save them a huge initial investment in a building. Losing a tenant and opportunity cost of a income is risky but appropriate. Also reclaiming your net working capital at the end of the project is a very beneficial factor.