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: The cost to install the required equipment will be $75,000 and this cost is incurred prior to any cash is received by the project. The expected cash inflows are the most variable of the estimates. Your partner is convinced that the firm will receive $15,000 annually for 7 years. You have your doubts. You think it is more reasonable that there will be cash inflows of $14,000 in years 1-2, then inflows of $15,000 from years 3-4, and then inflows of$17,000 for years 5-7.
You both agree that after 7 years, the equipment will stop working and can be sold for its parts for about $5,000. Although you are hesitant to assume a 6% discount rate on this project (not much left for the firm after paying the interest on the loan) your partner is confident that this project will lead to other deals in the future that will bring in much more profit. 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:
1. Perform the two NPV calculations and provide a narrative of how you calculated both computations and why.
2. Then provide a summary conclusion on whether you should continue to pursue this business opportunity.
3. Finally, assuming your partner remains unconvinced of your conclusion, present relevant points of your analysis that you believe are compelling and persuasive in supporting your position.