What is the overall expected npv of proposal b

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Reference no: EM132243204

Assignment: National Rehabilitation Centers

Staged Entry Analysis

1. Consider the R&D expenses.

a. Why aren't these expenses classified as "sunk costs?"

b. Explain why the R&D expenses are solely a time value of money issue.

2. Assume that the Stage 1 project has average risk as compared to the company's current business line. What is Stage 1's freestanding expected NPV? Based on your financial analysis thus far, is Proposal B acceptable?

3. Now consider the expansion (Stage 2) project.

a. What is the NPV of Stage 2 at the end of Year 0 under each demand scenario?

b. What is Stage 2's expected NPV at the end of Year 0? Again, assume that Stage 2 has average risk.

c. For ease of analysis, Stage 2 has been treated as if it could be undertaken independently. Is this a realistic assumption? Does the stand-alone profitability of Stage 2 have any value in the decision process?

4. Now combine the two stages into a single project. Construct a decision tree to help in the analysis. What is the overall expected NPV of Proposal B?

5. Use the decision tree data to find Proposal B's standard deviation and coefficient of variation of NPV. Should Proposal B be classified as a high-, average-, or low-risk project? (For now, disregard the abandonment option.)

6. What is Proposal B's differential risk-adjusted NPV? (Again, disregard the abandonment option.)

7. Now consider the impact of abandonment at the end of Year 8.

a. What impact does the abandonment option have on the overall project's risk and return? (Hint: Return to the 10 percent unadjusted discount rate.)

b. What is the value of the abandonment option?

8. a. What type of risk was measured in the analysis? Is this appropriate? If not, how could you measure the relevant risk of the project?
b. In the analysis, you probably applied a single differential risk-adjusted discount rate to all cash flows, that is, to the cash flows of both stages. Does this make sense?

9. Describe the advantages and disadvantages of Proposal A (single, large investment) versus Proposal B (staged entry). Based on the limited amount of information available, what do you think the company should do? Carefully justify your final recommendations.

10. In your opinion, what are three key learning points from this case?

Reference no: EM132243204

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