NP Case study
In the case of a negative NP, the investment should not be supported. Through a focus on NP results of both projects we can conclude that the first project, MAD will create a larger value for the firm since its NP is higher: 7,1 50$ and DOD 7,056$. We consider in our case that the difference is negligible and both can be considered as projects which create considerable value.
Rhea Internal rate of return is important to analyze since it determine whether or not the project will be finally accepted.
The higher is the AIR, the higher is the operating rate of return with the shortest payback period of the cost of capital. Then, negative AIR of DODD project, considered as a “net loss” shows that the following project might be more risky for the company. 30th projects can provide a high NP so are interesting to execute. However, the difference remains in the analysis of the AIR.
The Match My Doll Clothing project is more stable considering that it provides a stable cash flow to the company. The Design Your Own Doll is quit more risky if we compare it to the MAD project.
Then, f the company has to choose between one of those project, the MAD would be the best one in term of economical profits and firm image and the less risky. Then, we used the cash flows to analyze the incremental effect of the project and to acknowledge the break-even point of both projects. The DOD projects break-even point, this means when operating profit will be positive, happen in 2012, whereas it happens in 2011 for the AMOCO. Financial capacity to overcome the project costs will occur earlier for the following investment.
Thus, MOD would be better to invest in. Rhea IT personnel is only recommended in the Design Your Own Doll, because we need that the IT create an application or a website so that the customer can design their own doll. The salary of the IT department as a cost of 435. The charge is handle by the profit of the next years. For the first two years during the start-up is there no profit so they will handle this charge when two years after they will obtain the first profit.
Erne DOC project expected growth revenue is much higher in the thirst years Witt a venue growth of 139. % in 2013 and 40. 8% in 2014 than the MAD which start Ninth a growth of 52. 4% and 22. 6%.
However, expected revenue growth remains stable and higher, 8%, for the MAD project than the DOD investment. It is therefore important to focus on the fact that the project is distinguished by the potential to enhance the production division of the company. But it is also important to stimulate future growth. Have a high growth rate from the beginning is not a determining factor in the selection of a project between another one.
It is highlighted in the two projects, Match My Doll Clothing and Design My doll, a main distinction.
Indeed, these two projects are mutually exclusive projects. Cash flows from these two projects are actually related and linked to each other. They have the same function implying that rather than complement each other, they are in fact in competition so they compete with one another. It is therefore important to consider the fact that when one of the two projects is chosen, then the choice cancels any consideration about the other project.
It is obvious that both of the project will remain competitive with each other in terms of investment, and in the long term. It would be foolish to set up the second project after the first set up, even years later.
These results are and will always be mutually exclusive. Rhea fact is that there obviously an effect on the other project. Indeed these projects are those whose cash flows are related, they do have the same function and they thus compete with one another. This means that the acceptance of one project eliminated from further consideration other projects.