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You and your lifelong friend are partners together in the promotional materials business. That is , when marketing firms and their clients begin advertising or
You and your lifelong friend are partners together in the promotional materials business. That is when marketing firms and their clients begin advertising or public relations campaigns, they come to your company to obtain the materials and products that would support the ad campaign. Examples of the materials and products you supply are printed posters, signs, Tshirts with printed logos key chains, and other such items. You supply these items by procuring them from other sources or in some cases you manufacture them using various equipment in a warehouse you use near the center of the city.
You and your business partner are planning the next major project for your company. The project is a significant step in the growth of your firm in that the project will generate cash inflows into the firm for many years into the future. However, there will be a large investment of funds required by the firm to launch the project. The planning is in its preliminary stages where the numbers and other data are gross estimates. Despite the fuzzy numbers you and your partner still need to decide whether the project will be worth pursuing.
The following is some of the estimated data you have:
You both decided to finance the project using your own funds.
The cost of the equipment will be $ and this cost is incurred prior to any cash is received by the project.
The expected cash inflows are the most variable of the estimates. Your partner is convinced that the firm will receive $ annually for years. You have your doubts. You think it is more reasonable that there will be cash inflows of $ in year then inflows of $ from years and then inflows of $ for years
You both agree that after years, the equipment will stop working and can be sold for its parts for about $
You both consider a discount rate of but remain open to other future possibilities.
You trust your partners instincts and agree to start analyzing the feasibility of the project.
Requirements.
Name your company.
Calculate using payback period method.
Perform net present value NPV calculations for the project using your partners estimates and then using your estimates.
Explain how different cashflow affect your discussion making approach to accept or reject the project.
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