Power of net present value methodology

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Reference no: EM133674456

The power of Net Present Value (NPV) methodology in evaluating various alternatives and deciding on the best alternative.

Sam really liked working for his Dad, Richard. Richard owned a lawn and garden service business, Lawn Tech. The business has a good reputation and demand for the company services has risen steadily over the last decade.

Sam wanted to expand his business beyond chemical and synthetic lawns into organic and green products and services. Sam knew that his Dad would not be encouraging of this change because Lawn Tech's reputation and client base were not asking or demanding organic lawn care. However, Sam's vision for Lawn Tech differed from his Dad. The more he studied organic lawn service and garden products, the more convinced he was that Lawn Tech's future success would come from finding a balance between chemical and organic approaches. Expanding the business would require three new employees for marketing and sales, new training regimens, new manuals, and new marketing.

At heart, Sam wanted to run his own business. His Dad promised him ownership of Lawn Tech, but that discussion did not go any further.

Sam considered a few choices:

A. Leave Lawn Tech and work for another lawn service business.

B.Leave Lawn Tech and start a new business, in competition with Lawn Tech

C.Continue on the current course.

Questions:

1. How would a financial consultant advise Sam to choose among the alternatives?

2. What data would Sam need to make a rational decision?

3. Share a spreadsheet template Sam could build to compare the choices (provide details). (the mini case does not provide you with any numbers to enter in a spreadsheet. However, you can make a template /layout. Lay out categories of cash in and cash out on the rows and time on the columns. What discount rate would you likely use? A discussion on this is also welcome.)

4. Share your understanding of the use of NPV and its shortcomings.

5. How careful should the decision maker be in interpreting the results of the NPV analysis?

Reference no: EM133674456

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