Just before Nelly left her office for a lesson with her golf professional the phone rang.
"-Hi, Nellie, you better come to our London office tomorrow morning at 8AM. We have already booked you a room at the Savoy for tonight. We'll meet for dinner at 8PM at the Grill." End of the call. It was Ian Bournemouth II, Chairman of the Board. Nellie knew that if he booked her at Savoy and liked to eat dinner with her something big was on the go and he was worried! Nellie called her husband to let him know that the kids are all his for the evening and she don't really know when she will be back. As always Savoy is wonderful and so was the dinner except for the conversation. Before the dinner she found a message in her room - bring pen and paper. Early on during dinner the chairman was rather tense and had problems to formulate himself but finally he decided to let her know… "We have a conflict in the board!" "We are up for something big and this is how it works". Nellie had to sit with her pen and paper as the dinner went on and the chairman told her the story: "We are looking at investing in a new supply chain structure. The initial investment is £18 000 000. During the first year there is a likelihood that this would deliver £15 000 000 with a 25% chance and 75% that is would deliver £10 000 000.
If then we get the £15 000 000 the likely outcome for the next year would be 30% at £10 000 000, 25% at £12 000 000, 35% at £17 000 000 and 10% at £25 000 000." Nelly interrupted; I assume cash flows in the end of each year. The chairman continued: " yea in the end of each year to make it simple." He then continued. "If we get the £10 000 000 during the second year we expect 30% at £8 000 000, 25% at £10 000 000, 35% at £20 000 000 and 10% at £25 000 000". Nellie looked at Mr Bournemouth. "We first need to decide for what risk we are faced with. Supply chains are very difficult
to predict and I like to have a 20% required return on this". The chairman agreed. Ian went on and mentioned that he liked the idea but three board members are planning a vote against him
during the board meeting that starts at 9AM tomorrow morning. They claim that he has not provided them with a good base for decision. They agreed to meet in office at 8AM. Nelly understood that she had a long night in front of her. The chairman mentioned that he really enjoyed the food and her company and left the table. Make the needed assessment of the project, make proper calculations and give your recommendation for how to proceed.