After keenly evaluating the Present Net Value (NPV) of the relevant scenarios arising from the project analysis, it is recommended that the project is viable and consequently should earn the approval of the Investment Committee. The decision has been arrived at as a result of the NPV for each scenario turning out to be higher than zero, which is an indication that the costs involved are less than the project benefits and probably a green light to go ahead with the project.
Factors leading to the Recommendation
A lot of considerations were at play before finally reaching any recommendations. Key among these considerations included Nominal Payback, which was an effective determinant of the project’s financial feasibility. Payback analysis was able to provide answers on when the project would fully recover, which in all the four scenarios indicated three years and below. Such periods are well within the project’s full-blown period, which is five years before an expected technological shift. In Payback analysis, shareholders are provided with information regarding the maximum period they will wait for the investment to get back their money. The lesser the payback period, the viable the project becomes. However, this model has a few known weaknesses that make not to be the only tool guiding decision making. One of the significant shortcomings of payback analysis is that it never recognizes returns after the investment is paid back. Also, it concentrates a lot of biases on the time of investment, not knowing that some business models take a lot of time to gain substantial market dominance. It is for such reasons that the business considered an analysis of IRR and NPV for the final recommendation.
The NPV, which is also referred to as Discounted Cash Flow (DCF), issues projections on the expected cash flows of the project and discounts them based on the present value. It informson the difference between the current value of cash inflows and the current value of cash outflows over a definite period. The NPV analysis was instrumental in influencing the final recommendation issued in this paper because no other report comes close to the potential reality like than it. It offered insights into the expected value creation capability of the project in a definite dollar amount. With the project’s positive NPV, which is an indication of the fact that the project is profitable as far as the investment planning and capital budgeting are concerned. The assumption here is that the investment which returns a negative NPV is evidence of net loss at the end of the business period. The NPV principle is found on the concept of an NPV rule, which states that investments with positive values stand a chance to succeed hence should be considered.
Finally, the analysis also relied on IRR analysis, which provided a comparison between either investor or management set return target and the IRR itself, thereby reflecting the target the company seeks. This analysis model provided a number of insights to the decision process of this project, including investment return analysis, return metrics of investment wholesomely, which encompasses cash flows levered, and finally, project financing reliably giving varied perspectives of the project characteristics.
Collection and Source of Information
The analysis process depended on various data that were availed by senior shareholders holding different strategic positions as far as this project is concerned. For instance, it was extremely vital to obtain perspectives from departments such as accounting, sales, and marketing and engineering, which largely comprises the production unit of the firm. Also, opinions collected from product managers and operations formed part of primary data as we moved into the actual analysis. There were also originally provided data by the investment committee, together with others from the finance department resulted in a data set that is now providing this recommendation.
Benefits and Risks of the Project
Thereare few advantages related to the pursuit of thisproject,the same way there are underlying risks associated with it too. Some of these advantages includedcost-effectiveness or its business viability, economies of scale, correct visibility of the overall process, high profitability, and also a high degree of control over puts. On the other hand, the project presents a number of risks, including challenges related to the achievement ofenvironmental compliance, supply chain challenges, and high rates of technological depreciation.The analysis models that influenced the decision communicated in this memo also have known weaknesses that may catch up with the implementation of the project. In other words, it is common knowledge that projects, as envisaged on paper, presents additional challenges during actual implementation.
The financial scenario that the analysis process dealt with comprised estimated equipment whose purchase price $ 500, 000; additional networking capital to support production is estimated at $25,000 per year commencing in year 0 and through all five years of the project to support production. Also, there was annual spending on the component currently stands at $875, 000, bringing the process in-house will attract an estimated annual savings of 20% which translates to $175,000, the company qualified for a credit that would attract 6% interest rate and equipment terminal value after 5 years $ 25, 000. The analysis took care of five different scenarios, which eventually provided a number of outcomes leading to the recommendation communicated herein.
The question of make-or-buy presents uncertainty to the management of manufacturing organizations even when analysis plus another considerable basis of decision making loudly tell the option to go with. In conclusion, it is safe if the company considers making over buying as recommended in the opening statement. The analysis considered models such as payback period, NPV, and IRR to arrive at a decision.
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