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Kristine's Contribution
Case 2: Piedmont Trailer Manufacturing Company
Answers to Ms. Pablo's Questions (Information Specifications)
1. How will discount rates of 10, 12, and 14 affect the project's feasibility?
By looking at the overall net present value, we can determine if the project adds value to the firm. Based on the results above, as the discount rate increases, the overall net present value decreases. Thus, a higher discount rate will make the project less feasible as it will not contribute more value to the company.
2. If management stipulates that the internal rate of return must be equal to or greater than the discount rate, is this project still justifiable?
When the discount rate is 14%, the corresponding IRR is 9%. To manipulate this as required by the problem, I used "goal seek" which is part of the what-if analysis feature of MS Excel. Based on the results, if the IRR is equal to 14%, the discount rate decreases to 9%. On the other hand, if the IRR is 18% which is greater than 14%, the discount rate further decreases to 5%. The project is still justifiable since both inputs yielded a higher overall net present value.
3. How will eliminating an additional staff position of $25,000 affect the economic feasibility assessment?
To eliminate the additional staff position, I added $25,000 to the staff reduction benefit and got $70,000. This increased the total yearly recurring benefits to $320,000.
As a result, the overall net present value and the IRR drastically increased making the project more feasible.
4. Assume that the staff position mentioned in step 3 is eliminated and that the site preparation cost increases to $95,000. What impact will these changes have on the project's feasibility?
To make the site preparation cost $95,000, I added $36,500 to its original value. The total costs increased to $293,157.
Considering that the staff position was eliminated and the costs increased, the resulting overall net present value and the IRR decreased making the project less feasible.
Note: My Excel file is attached below.
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Infosys Group Work No. 2_Cost-Benefit Analysis_Canlas.xls (Excel Worksheet - 28k)
posted by KristineErika Feb 2 2008, 10:38 AM EST
Case 2: Piedmont Trailer Manufacturing Company
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