Williams & Associates, LLC has been operating for two years within the consulting industry. They now look to expand their efforts to new projects. Three mutually exclusive options are available for the company. Each project will require some form of debt to finance.

Option A will cost $5,500 in capital to commence and will take three years to complete fully. They forecast only $300 for the first year, but that will increase to $900 by Year 2 and concluding with $6,000 in the final year.

Option B is more expensive at an initial investment of $6,000. However, it has immediate cash revenue at $5,000 by Year 1. This drops to $1,000 for the second year, but this climbs back to $2,000 in Year 3.

Option C is the most expensive with $10,000 upfront. It’s also tricky with cash flow in Year 2 of $1,000 that only appears at the end of June (fiscal year). It will generate $4,000 at the conclusion of the calendar Year 1 and $7,000 at the end of Year 3.

Currently, the Wall Street Journal Prime Rate is at 7.5%. The Fed expects a target 4% increase in rates over the next three years.

Assignment

Discount each option from a value perspective. Using NPV, is each option valuable? Which is the most? What other factors would be considered in the decision-making process?

Contingencies are always considered for companies. What if the discount rate for this example changes? Therefore, calculate the IRR for each scenario and create a line chart NPV profile following the rates listed above (including those from your IRR calculations) and those below:

1%, 3.25%, 4%, 5%, 12%, 15%, 20%, 25%

How does the crossover rate(s) affect the valuable option(s)?

Answer rating: 100% (QA)

Part 1 Calculate NPV for each option Step 1 Calculate the NPV for Option A Option A cash flows Year 1 300 Year 2 900 Year 3 6000 Discount rate for eac... View the full answer