Business & Finance Case Study – Projections, NPV, Compilation

Certainly! Let’s create a hypothetical case study focusing on business and finance, involving projections, Net Present Value (NPV) calculations, and compilation of financial data.

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Case Study: TechStart Inc. – Expansion Decision

Background:

TechStart Inc. is a rapidly growing technology startup specializing in software development. With its innovative products gaining traction in the market, the company is considering expansion opportunities. The management has identified two potential projects: Project A and Project B. Both projects require an initial investment and are expected to generate cash flows over the next five years.

Project A:

Project A involves developing a new software application for the healthcare industry. The initial investment required for Project A is $500,000. The projected cash flows for the next five years are as follows:

• Year 1: $150,000
• Year 2: $200,000
• Year 3: $250,000
• Year 4: $300,000
• Year 5: $350,000

Project B:

Project B involves expanding the company’s existing product line by introducing a new gaming software. The initial investment required for Project B is $600,000. The projected cash flows for the next five years are as follows:

• Year 1: $100,000
• Year 2: $150,000
• Year 3: $200,000
• Year 4: $250,000
• Year 5: $300,000

Discount Rate:

TechStart Inc. uses a discount rate of 10% to evaluate investment opportunities.

Tasks:

1. Calculate the Net Present Value (NPV) for each project.
2. Determine which project TechStart Inc. should undertake based on NPV.
3. Compile a summary of financial data for both projects.

Solution:

1. Calculation of NPV:Project A NPV: NPV = (-$500,000) + ($150,000 / (1+0.10)^1) + ($200,000 / (1+0.10)^2) + ($250,000 / (1+0.10)^3) + ($300,000 / (1+0.10)^4) + ($350,000 / (1+0.10)^5) NPV = -$500,000 + $136,363 + $165,289 + $187,602 + $214,193 + $214,193 NPV = $317,640Project B NPV: NPV = (-$600,000) + ($100,000 / (1+0.10)^1) + ($150,000 / (1+0.10)^2) + ($200,000 / (1+0.10)^3) + ($250,000 / (1+0.10)^4) + ($300,000 / (1+0.10)^5) NPV = -$600,000 + $90,909 + $124,590 + $150,414 + $171,285 + $184,716 NPV = $21,914
2. Decision:Based on the NPV calculations, Project A has a higher NPV ($317,640) compared to Project B ($21,914). Therefore, TechStart Inc. should undertake Project A as it offers higher profitability.
3. Summary of Financial Data:ProjectInitial InvestmentYear 1 Cash FlowYear 2 Cash FlowYear 3 Cash FlowYear 4 Cash FlowYear 5 Cash FlowNPVProject A$500,000$150,000$200,000$250,000$300,000$350,000$317,640Project B$600,000$100,000$150,000$200,000$250,000$300,000$21,914

This summary provides a clear comparison of the financial aspects of both projects, aiding TechStart Inc. in making an informed decision regarding its expansion plans.

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This case study demonstrates the application of financial analysis techniques like NPV to evaluate investment opportunities and make strategic decisions.