Power

The proposed project by Power to introduce a new microchip was carefully reviewed and analyzed by myself. After my analysis, I believe that the new microchip project should NOT BE APPROVED. Pro forma financial statement analysis was used to assess the projected cash flows, income and net present value (NPV), providing an accurate picture of the expected financials.

According to details, the project has a 10-year lifetime. According to this information this project has a NPV of -$531,654. Initial start up costs is at $20,000,000, which is purchased on a bond. The cost of capital for Power is 10%. According to these details, the IRR must be at least 9.4%, in order to show a NPV of $0.

The board has shown concern regarding the discount rate used to acquire capital, as this is a new project. Though Power’s cost of capital is stated at 10%, higher costs of capital were taken into account, and measured when assessing project value. As the cost of capital rises, the NPV of a project decreases, as is shown in Table. Discount rate of 10%, as stated shows NPV of -$531,654, whereas a discount rate of 25% shows -$9,057,840. The maximum rate at which Power should finance its costs is 9.4%, otherwise it will be operating at a loss. See Chart 1. (See Excel sheet financial details and calculations).

There is another important concern amongst the board members, this regarding the projected operating income. Concerns of competition, taking away as much as 50% of Powers operating income, was put forth. At a discount rate of 10%, and operational income at 50%, NPV of the proposed project would be -$16,302,128. Competition will be a major issue for this project, as managers will have to carefully assess the market, the demand, and its current position versus its competition.

Payback analysis is a favorite amongst some of the board members. This simple method (normal and discounted values) tells you how long it will take...