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Capital Budgeting Case.docx

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Luvnica Verma, Ph.D.
Luvnica Verma, Ph.D.

The company has been offered an 8-year contract from a major phone manufacturer that would require an upfront investment of €50 million but generate annual cash flows as shown. To evaluate the contract, the assistant: 1) Built a spreadsheet to calculate the internal rate of return (IRR), profitability index (PI), and net present value (NPV) of the contract using the company's 12% required return and 10% reinvestment rate. 2) Based on the results, the assistant would recommend accepting the contract if the IRR exceeds 12%, the PI is greater than 1, and the NPV is positive, since those results would indicate the contract is profitable and meets the company's return objectives

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Case-Study Net Present Value and Other Investment Rules Mini Case You have set up a new firm in Copenhagen to produce mobile face recognition technology for all new smartphones. An opportunity has arisen, which would result in a new contract with a major mobile phone manufacturer that would massively transform your firm’s operations. The contract would require a significant upfront investment of €50 million and the contract would last for eight years. The year after the contract has ended (that is, in year 9), your firm will bear all decommissioning costs, which are expected to be €8 million. The expected cash flows each year from the contract are shown in the table below. Davies Electronics has a 12 per cent required return on all its technologies but can rei4nvest future cash flows only at a rate of 10 per cent. 1. Construct a spreadsheet to calculate the internal rate of return, profitability index, and net present value of the proposed contract. 2. Based on your analysis, should the company take the contract?

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Capital Budgeting Case.docx

  • 1. Case-Study Net Present Value and Other Investment Rules Mini Case You have set up a new firm in Copenhagen to produce mobile face recognition technology for all new smartphones. An opportunity has arisen, which would result in a new contract with a major mobile phone manufacturer that would massively transform your firm’s operations. The contract would require a significant upfront investment of €50 million and the contract would last for eight years. The year after the contract has ended (that is, in year 9), your firm will bear all decommissioning costs, which are expected to be €8 million. The expected cash flows each year from the contract are shown in the table below. Davies Electronics has a 12 per cent required return on all its technologies but can rei4nvest future cash flows only at a rate of 10 per cent. 1. Construct a spreadsheet to calculate the internal rate of return, profitability index, and net present value of the proposed contract. 2. Based on your analysis, should the company take the contract?