Project Feasibilty and Npv

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Principles of Managerial Finance

MBA6, GROUP 1

Phelps Toy Company

TOYS

Prepared by :Essam Gayad , Aladdin Al-Jajeh, Majed Mourtada , Shaza.Rifaai MHD Obada Morad

Date 22nd May 2012
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Phelps toy company case, 6 YEARS BUDGET STUDY, PROJECT FEASIBLITY Table (1) sales and net income of the company for the past years. year
1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

$SALES
150,000 240,000 756,000 1,340,000 2,680,000 3,320,000 5,580,000 6,792,000 5,941,000 9,237,000 11,622,000 12,140,000 17,165,000 22,838,000 27,762,000 32,437,000 38,911,000 39,750,000 39,860,000

NET INCOME
(16,000) (5,000) 72,000 91,000 175,000 198,000 248,000 387,000 291,000 439,000 566,000 621,000 850,000 1,221,000 1,437,000 1,628,000 1,762,000 2,002,000 1,950,000 MBA6 -MF

FIG(1)

$

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FIG(2)

$

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The need to produce new products was becoming evident, as sales and net income were beginning to level off in the last two years, (1991 and 1992). The profitability ratio (net profit on sales) was decreasing a little bit from 5% to 4.8%. Phelps Toy Company had then to consider the advisability of adding a new product to its line. After doing market research and analysis of possible products, Mr. Barnes, who was in charge of new product development, decided that baseball cards market was a good choice for potential sales.

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A baseball card is a type of trading card relating to baseball. A card features a baseball player. Cards are found in the US, Canada, Cuba, and Japan, where professional leagues are present with a substantial fan base to support them. Companies notable for making cards are Topps, Upper Deck, Fleer, Donruss, … Baseball cards can be highly collectible. Many antique stores contain a wide variety of baseball cards. Some baseball cards can be worth thousands of dollars.

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However, In evaluating the market potential, Mr. Barnes determined that there was no way he could firmly predict the market penetration potential for a new set of baseball cards. How was the problem solved Over the years, Phelps Toy Company had to develop a manual to evaluate capital budgeting process. First, a forecast of the fully-potential sales over the six years to come was required. Though it was too short a period, Mr. Barnes had no choice but to go along with the company policy. He decided to project a range for potential sales in 1994 (the first year of business) and assign probabilities to the outcomes.

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Assumption TABLE (2) Year 1 sales expectations

Sales $

probability

SALES X PORB($)

Pessimistic Normal

1100000 2000000

0.25 0.40

275000 800000

Optimistic
Highly optimistic

3750000
4500000

0.20
0.15

750000
675000

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TABLE (3)

Year 2,3,4 sales expectation Year 5,6 sales expectation Operation expenses Cost of investments (printing ..equipment) 5 years MACRS depreciation is used Tax rate Standard deviation of year 1 sales TABLE (4)

20% GROWTH of first year 10% GROWTH of first year 70% of sales each year $2.8 million 34% $ 1226000

Coefficient of variation 0 – 0.20 0.21 – 0.40 0.41 – 0.60 0.61 – 0.80 Over 0.80

Discount rate % 8 10 14 16 20
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Questioned required to be answered

1-Table of earnings before depreciation and taxes (EBDT), Tax, Net Income, … 2-Determine the appropriate discount rate. 3-Make a decision about the feasibility of the project (NPV).

4-What is the drawback to using a six-year time horizon for the project?

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Answers to the questions above CALCULATION OF FIRST YEAR SALES:

Sales $
Pessimistic Normal Optimistic Highly optimistic AVERGE 1100000 2000000 3750000 4500000

probability
0.25 0.40 0.20 0.15

($) SALES X PORB
275000 800000 750000 675000 2,500,000

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Standard Deviation of Sales Forecast In the preparation of a comprehensive marketing plan, sales forecasts help the marketer develop...
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