Case study 2 ARROYO DE MONTESSUS
Thomas De Montessus Exchange student 104425
Matteo Arroyo Exchange student 104416
Assignment 2.
Company has to choose between the two projects according to an evaluation based on discounting cash flows and the analysis of the NPV of both projects. An investment with a positive and high
NPV is profitable investment and is more likely to me accepted by the company. A positive NPV means that the investment creates value and therefore the project generate enough cash flow to cover the cost and provide enough returns to the shareholders. In the case of a negative NPV, the investment should not be supported. Through a focus on NPV results of both projects we can conclude that the first project, MMDC will create a larger value for the firm since its NPV is higher:
7,150$ and DYOD 7,056$. We consider in our case that the difference is negligible and both can be considered as projects which create considerable value. The Internal rate of return is important to analyze since it determine whether or not the project will be finally accepted. The higher is the IRR, the higher is the operating rate of return with the shortest payback period of the cost of capital.
Then, negative IRR of DOYD project, considered as a “net loss” shows that the following project might be more risky for the company.
Both projects can provide a high NPV so are interesting to execute. However, the difference remains in the analysis of the IRR. The Match My Doll Clothing project is more stable considering that it provides a stable cash flow to the company. The Design Your Own Doll is quit more risky if we compare it to the MMDC project. Then, if the company has to choose between one of those project, the MMDC would be the best one in term of economical profits and firm image and the less risky. Then, we used the cash flows to analyze the incremental effect of the project and to acknowledge the break-even point of both projects. The DYOD projects break-even point, this means when operating profit will
Matteo Arroyo Exchange student 104416
Assignment 2.
Company has to choose between the two projects according to an evaluation based on discounting cash flows and the analysis of the NPV of both projects. An investment with a positive and high
NPV is profitable investment and is more likely to me accepted by the company. A positive NPV means that the investment creates value and therefore the project generate enough cash flow to cover the cost and provide enough returns to the shareholders. In the case of a negative NPV, the investment should not be supported. Through a focus on NPV results of both projects we can conclude that the first project, MMDC will create a larger value for the firm since its NPV is higher:
7,150$ and DYOD 7,056$. We consider in our case that the difference is negligible and both can be considered as projects which create considerable value. The Internal rate of return is important to analyze since it determine whether or not the project will be finally accepted. The higher is the IRR, the higher is the operating rate of return with the shortest payback period of the cost of capital.
Then, negative IRR of DOYD project, considered as a “net loss” shows that the following project might be more risky for the company.
Both projects can provide a high NPV so are interesting to execute. However, the difference remains in the analysis of the IRR. The Match My Doll Clothing project is more stable considering that it provides a stable cash flow to the company. The Design Your Own Doll is quit more risky if we compare it to the MMDC project. Then, if the company has to choose between one of those project, the MMDC would be the best one in term of economical profits and firm image and the less risky. Then, we used the cash flows to analyze the incremental effect of the project and to acknowledge the break-even point of both projects. The DYOD projects break-even point, this means when operating profit will