Finance Assignment

RUNNING HEAD: TEAM 1 TASK 4 1

TEAM 1 TASK 4 2

TASK 4

Team 1:

Adetolani Adeosun

Lawrence Henderson

Ayoub Mfinanga

Brittany Raines

Matthias Wurster

Memo to CFO

Executive Summary:

After an NPV and Real Options analysis, we have concluded that the new enterprise system is worth the investment. The projected Good scenario and the Real Options analysis projected a net present value of $42 Million and $2 Million respectively. So, therefore the positive NPV indicates that the project should be undertaken. It should be noted that if the market demand or the implementation difficulty shows a higher potential for the Bad scenario, then the project should not be undertaken. The Bad scenario NPV was -$38 Million, so this is certainly a risk to be noted. That being said, in this time of considerable uncertainty, our analysis still shows that the project should be undertaken as it will in all likelihood generate cash flows to more than make up for the investment.

Analysis:

See attached excel sheet for calculations

The following analysis used the Net Present Value of the aforementioned Good and Bad scenarios. We also used the Real Options Approach. Using a discount rate of 10 % for the Good and Bad scenarios for the cash flow amounts of $15 million and $2 million, we found that the “Good” NPV is $42,168,507 and the “Bad” NPV is -$37,710,866. Therefore, the Good scenario resulted in a positive NPV, so this indicates that our organization should proceed with the investment . However, the Bad scenario resulted in a negative NPV, which shows that the project should not be undertaken. To give better context to this measure, we used the Real Options approach, utilizing the 10% markdown rate and yearly cash streams of $8.5 million ($15 million*50%+$2 million*50%=$8.5 million), discounted for 10 years, minus the $50 million beginning speculation, the NPV totaled at a positive $2,228,820.

Conclusion:

Based on the analysis provided above, the project will in all likelihood generate a positive NPV and should therefore be undertaken. The Good scenario provided an NPV of $42,168,507 and the Real Options Method resulted in an NPV of $2,228,820. However, the Bad scenario resulted in an NPV of -$37,710,866. If the expected probability of the bad scenario increases, then the project may not be worth the investment. Even with this stipulation, the project should be undertaken given the positive NPV of both the Good scenario analysis and the Real Options Approach.