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14,
2014
Report
Findings
Project
Conclusion
Ms.
Couts,
When
you
hired
me
for
this
project
you
expected
a
thorough
analysis
of
all
of
the
information
you
supplied
me
with.
I
assure
you
this
was
done.
Deciding
whether
or
not
to
take
on
a
new
project
is
a
capital
budgeting
decision
that
should
be
explored
in
detail
and
leave
as
little
as
possible
to
the
imagination.
In
the
following
report
I
have
broken
down
all
of
my
findings
and
you
have
my
final
conclusion
on
whether
to
move
forward
with
the
operation
or
not.
The
first
topic
up
for
discussion
is
the
costs
Conch
spent
on
developing
the
new
PDA
prototype
and
the
costs
of
the
marketing
study.
Unfortunately,
these
are
unnecessary
in
determining
whether
to
accept
the
project
or
not.
Both
of
these
are
sunk
costs,
the
money
has
been
spent,
and
cannot
be
recovered,
making
them
irrelevant
in
our
further
calculations.
The
rest
of
the
information
was
used
in
the
analysis
of
the
project.
Below
are
four
calculations
that
are
helpful
for
determining
whether
to
accept
the
new
PDA
project
or
not:
1.
Payback
Period:
2.81
years
2.
Profitability
Index:
1.82
3.
IRR
(Internal
Rate
of
Return):
29.417%
4.
NPV
(Net
Present
Value):
$17,560,593.82
An
investment’s
payback
period
is
the
time
it
takes
for
a
company
to
recover
the
cost
of
the
investment.
In
this
case,
it
will
take
2.81
years
for
Conch
to
recover
the
cost
of
the
new
machinery.
This
is
a
relatively
short
period
of
time,
which
is
a
good
sign,
but
we
shouldn’t
base
our
decision
on
this
alone
due
to
the
drawbacks
in
the
payback
period
calculations.
Our
second
calculation
was
the
profitability
index,
which
measures
the
value
that
is
created
per
dollar
invested.
A
profitability
index
over
1
is
good,
so
the
investment’s
PI
of
1.82
is
another
sign
that
this
is
a
good
project
to
take
on.
The
internal
rate
of
return
is
the
discount
rate
that
would
make
the
net
present
value
of
the
project
zero.
Generally
speaking,
the
higher
the
IRR,
the
better
the
investment.
It
is
also
known
that
if
the
internal
rate
of
return
is
greater
than
the
actual
required
return,
the
investment
is
worth
taking
on.
Our
IRR
of
29.42%
is
greater
than
the
required
return
of
12%,
proving
again
that
this
is
a
good
business
venture
for
Conch.
While
the
first
three
calculations
have
shown
that
purchasing
the
equipment
and
producing
the
new
PDA’s
is
a
good
idea,
the
fourth
calculation
is
the
most
accurate
in
actually
making
the
decision.
There
are
big
flaws
with
each
of
the
three
formulas
above,
whether
it
is
the
payback
period
not
taking
into
account
the
time
value
of
money,
or
the
internal
rate
of
return
when
dealing
with
unconventional
cash
flows.
Each
one
has
its
advantages
and
disadvantages,
but
the
best
calculation
to
use
is
the
Net
Present
Value.
The
NPV
of
an
investment
is
an
indicator
of
how
much
value
a
project
will
add
to
the
firm.
And
if
a
project
has
a
positive
Net
Present
Value,
it
is
a
good
investment
that
will
make
the
company
money.
When
calculating
the
NPV
we
discount
the
future
cash
flows
to
the
present,
so
if
in
today’s
time
the
value
of
the
project
is
positive,
we
should
go
forward
with
it.
The
NPV
of
our
project
is
positive,
which
means
that
this
investment
is
a
good
idea,
but
there
is
still
a
problem.
We
used
estimates
to
calculate
the
NPV;
our
estimates
could
turn
out
to
be
very
wrong.
In
order
to
combat
this,
we’re
going
to
perform
more
analyses
on
the
numbers
to
see
if
our
results
will
still
hold
up.
Conch
Republic
Electronics
should
pursue
the
manufacturing
of
the
new
PDA’s,
but
there
are
still
other
factors
to
consider.
What’s
the
best/worst
case
NPV
and
what
the
break-‐even
price
is
for
the
new
PDA
are
just
a
few
of
the
questions
I
will
answer
with
the
rest
of
my
report.
In
scenario
analysis,
we
change
factors
to
be
representative
of
the
worst
possible
outcome
or
the
best
possible
outcome
of
the
project.
For
example,
we’ll
choose
a
best
and
worst
case
scenario
for
the
price,
sales
demand,
and
costs
to
determine
how
the
NPV
changes
in
comparison
to
our
base
case
(the
estimated
numbers
I
was
provided
with).
In
the
table
below
I
outlined
which
numbers
I
changed
for
each
of
the
analyses,
providing
the
best,
worst
and
base
case
numbers.
Base
Case
Worst
Case
Best
Case
Unit
Sales
(year
1)
74,000
69,000
79,000
(year
2)
95,000
90,000
100,000
(year
3)
125,000
120,000
130,000
(year
4)
105,000
100,000
110,000
(year
5)
80,000
75,000
85,000
Price
Per
Unit
360
350
370