These two cases to consider the investment decisions of managers of large chemical companies are made in January 2001. The A ‘case, a go / no-go project evaluation regarding improvements to a polypropylene production plant. The B ‘case, checked the same …show more content…
This hence results in a decision involving declining or rejecting the erosion being made. According to the final revised discounted cash flow presented, the projected incremental profit has increased from the years 2013 to 2017. This is the case where no adjustments of the erosions have been made. The two cases also depict that the profits are greater where there in no erosion has compared where the erosion has been adjusted. The effect brought by erosion includes the cannibalization effect which will impact the firm negatively.
The net present value has been adjusted based on the same discount rate of 10 percent. Given the years 2013 to 2017, the NPV when there is full erosion is as follows:
Initial investment is 12 million pounds. The projected cash flows for the period include 2.72, 2.81, 2.87, 2.93 and 3.01 million respectively. The net present value is -1.18 million sterling pounds. IRR is calculated as the future value of an investment divided by the present value adjusted by the number of years. The internal rate of return is 12.5 percent. he net present value when there is no charge for erosion for the periods 2013 to 2017 is as follows:
The discount rate is 10 percent. The projected cash lows for the period are 3.81, 3.93, 4.03, 4.13 and 4.24 respectively. The net present value is 0.54 million sterling pounds. The IRR is 14