Bryce Kmetz Lisa Shiermister Quangling Wang Project 2-1 PDF

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Bryce Kmetz Lisa Schiermeister Quanling Wang Project 2 Write up FIN 3250 11/24/13 Through the course of this project we have learned a great deal regarding cash flows and decision analysis. When making business decisions, it is pivotal to recognize all the pertinent factors. Failure to do so could result in anything from diminished financial gains to bankruptcy. It is also important to have a sound understanding of basic financial principals such as NPV (net present value) and IRR (internal rate of return). Such financial instruments allow you to understand the implications of your decisions. Furthermore, they enable you to calculate approximate returns, which can be optimized by selecting the superior alternative. Under the initial scenario with an incremental growth in revenues of 15%, 10%, and 5%, we found the NPV to be negative. A negative NPV means that the cash generated is less than the acceptable rate of return. Additionally, the IRR was well below the cost of capital; meaning that it would cost more to borrow the money to fund the venture than the venture would generate. Similarly, in both the pessimistic and optimistic scenarios, the situation was comparable. The IRR was below the cost of capital and the NPV was negative. Because each scenario proved unsuccessful for the lounge, finding the final sales price that would make this project just acceptable was crucial. Without a high enough terminal sale, the project would be futile and money would be lost. To make the venture worthwhile would require a final sale value of $1,660,815. If you discount this final sales price along with the yearly cash flows back to the present, you will find an NPV that is not negative and an IRR that exceeds the 14% threshold....