Adv Management

Question 14.27

If an investment does not fit with an organization’s strategic plan, it is probably not a good idea, even if the NPV is positive. Do you agree or disagree? Explain.

The statement is somehow true due to the investments should be made that are consistent and fit with the company's strategy. The application of the net present value calculation states that if a project has a positive present value, it should then be undertaken. It will help to raise the value of the firm, which is the financial objective toward the shareholders of the company. Although NPV calculation only contains the endogenous value of a strategic investment, it has to be considered carefully because it can be regarded as the first step leading toward real options valuation. Sometimes a deal comes along that is too good to pass up and give up. In such a case and as long as the investment does not conflict with company goals and values, a company might depart from its original strategic plan or maybe can revise the company strategy plan to accommodate the investment.

Question 14.67

(c)When NPV = 0,

NPV = - Cº + C¹ + C² + C³

1+ r (1 + r) ² (1 + r) ³

0 = (RM120, 000) + 0.909 C + 0.826 C + 0.751 C

RM120, 000 = 2.31424 C

RM 120,000 = C

2.31424

RM 48,270.31376 = C

Note:

-Cº = Initial Investment

C = Cash Flow

R = Discount Rate

Two Formulas Develop:

1) Change in operating income = increase in contribution margin + energy cost savings – Depreciation expense

Y = RM 25,000 + P – RM42, 000

2) After-tax change in operating income = change in operation income - Tax on change in income

After-tax operating cash flow - add back depreciation expense = change in operating income – (change in operating income × 40%)

RM48, 270.31376- RM42, 000 = Y – (Y × 40%)

RM...