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Investment Appraisal Under Uncertainty
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DescriptionAssignment Investment Appraisal under Uncertainty
Investment Appraisal under Uncertainty
Investment represents one of the most important activity of any developing company. Capital investment projects require significant cash outflows so the efficiency of an investment project is crucial and could well be the boundary between success or failure of a company. That is why it is very important careful evaluations to be made and different investment appraisal methods to be implemented during the evaluation phase of a project.
We are a high-tech company operating in a highly innovative, fast-moving and competitive industry of smartphones with an annual turnover of about US$300,000,000. The estimated cost of the business opportunity is about US$60,000,000. Here is the proposed memo to be send to all of the members of the task force: We have a huge business opening and the opportunity to develop our core business and bring the entire company to a completely new level. Given the size of the company the cost of the project represents 1/5th of the annual turnover - this means changing the entire scope of the company through this investment project. We should decide whether to go for completing the R&D and the launching of a new generation of smartphones or not. We expect the industry to develop in this direction and pulling ahead of the competitors could give us a competitive advantage and a very big market share. But given the costs and the fact that we will need to change and develop our core business if this project fails it could be fatal for our company. Therefore we should evaluate the project very carefully and implement different appraisal methods, namely the PP, the NPV, and the IRR . If we move fast and the expected returns are big enough the company is prepared to take high level of risk. I suggest us to meet next week and discuss these matters.
Six months later I have the investment report ready and after reading it I am not sure the company should go for it. The project has a payback period of four years, positive net present value of US$15,000 and internal rate of return of 4% per annum. Since we are operating in highly innovative and fast changing market these are not satisfying figures. Four years in this industry is just too long time during which anything could happen - emerging of completely different and new technology replacing ours, changing the consumers' interests and needs, emerging of new highly competitive companies with fresh ideas . Moreover NPV of US$15,000 is ...
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