Based on my analysis, I do to recommend that the company invest in the project named Goliath Facility. In my analysis, I utilized some of the more popular valuation techniques to guide my decision: (l) Payback Method (II) Discounted Payback Method (Ill) Net Present Value (NAP), (lb) Internal Rate of Return ORR) and (v) Profitability Index. Results of Analyses I outline below the various techniques of assessment, the results and the rationale for accepting or rejecting the Investment.
Payback M Tanta – I en Investment Is outside AT ten realm AT ten company’s required payback period for the project. The Goliath Facility investment failed to meet the company’s criteria; as it yields a payback period of 7. 48 years. While the payback technique gives an indication of the time frame for recovery of capital outlay, It is also of note that this method does not account for inflation. 2. Discounted Payback Method – Based on this technique, the Goliath project would yield a payback period beyond 10 years. . Net Present Value – The NAP calculated for the Goliath project was a negative $26. Million dollar. This result indicates that the project is not expected to increase he asset base of HIP. Although the NAP method is biased in favor of large projects, it is highly recommended since it accounts for the time value of money, stakeholders required rate of return and investment risk. 4. Internal Rate of Return – The IRS calculated for the project was 7. 03%.
The rate calculated are below the required hurdle rate of 10%, attesting to previous assessments which indicated that the project is not acceptable. The AIR, an effective evaluation method, is close to the NAP and its use is rather popular in evaluating capital investment decisions. However, it offers from several problems, including the issue of scale, where a project that promises a lower value (NAP) to its shareholders may have a higher AIR than a larger project that promises a greater value. 5. Profitability Index – The index calculated for the Goliath project is . 5 establishing that both project is not a worthy investments. This method is closely related to NAP and AIR that inherits their benefits. However, it also suffers from the problem of scale that exists in the AIR. Sensitivity Analysis Sensitivity analysis is a technique that indicates how much NAP will change in espouse too given change in an input variable, other things held constant. A 10% increase in capacity utilization led to a very high 87% improvement in the NAP, the NAP being negative would be reduced to a smaller negative figure.
Similarly an increase in price yielded a stronger case for the Investment in the Goliath project. However a reduction in direct material cost per unit would also make the investment case stronger. Based on these it shows that the sensitivity of this project is very high yielding a steep sensitivity line, making the project a riskier one. Recommendation’s My assessment of the proposed investment project indicates that the project is not viable and HIP should not expand the manufacturing capacity of Hansson.
The risks associated with the project include not being renewed after three years and the risk of future opportunities of rapid growth and significant value creation by locking in strong relation with powerful retailer which is a high opportunity costs. However, if you accuse to take Into constellation AT ten prospects rap growth Ana gallants value creation, the company may consider investing in the project. Also an increase in the capacity would yield a better NAP [pick]