AQ plc is considering expanding its operations into Country X for a cost of £40 million. The following possibilities exist. A rival firm JQ plc also decides to expand its operations into Country X. Estimated annual earnings would be about £8 million. IF JQ does not follow AQ then the earnings would be about £13 million. If AQ does not go ahead but JQ does, then there could be some reputational damage to AQ which could affect current operations – a director estimates that the potential cost would be about the equivalent of a loss of £2 million sales per year.

The finance director wants to apply NPV calculations, but the managing director says that they are happy using the annual earnings as an estimate of the benefits.

a Consider the managing director’s viewpoint.

b Consider the problems of combining NPV calculations with competitive scenarios as described in this question.