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    Positive or Negative NPV

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    The Board liked the analysis you did on valuation and agreed to proceed with the expansion plan. Your CFO, investment bankers, and consultants have all been working on the cost and benefits of various expansion options. They have agreed on an option that will see simultaneous expansion into 5 domestic markets (Chicago, Dallas, Miami, New York, and Charlotte), Germany, and Brazil. The CFO has developed cost and benefits of the scenario in a spreadsheet and has asked you to review it.

    Look at the spreadsheet and use present value analysis to discount the cash flows. Include the calculations for net income, operating cash flows, free cash flows and the present value cash flows and NPV in your spreadsheet. Does the project have a positive or negative NPV? What are the implications for CPI and its shareholders if there is a positive NPV or a negative NPV. Is the dollar value of the NPV important in light of the expenditure? In making the final decision, what kind of economic assumptions do you think the CEO had to make. Articulate the economic and political risk with the strategy and list options to overcome. How will this decision affect the share price and the value of the company? In light of all this information, would you support the above-mentioned option for expansion? Why or why not?

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    Solution Preview

    // This paper will help the reader to understand about the concept of NPV. It also discusses the effect of NPV on shareholders as well as on CPI. We will also discuss various economic and political risks associated with the investment and how can managers overcome these risks. We will also explain the reasons why CPI should invest in the mentioned expansion project.//

    Net present value refers to the present values of all the anticipated cash flows that are likely to occur over the life of the project. It is the difference between the present values of cash inflows and the present value of cash outflows throughout the life of the project. If the NPV is negative, the company should reject the project, and if the NPV is positive, the company should accept the project. The NPV for the expansion project of CPI is $ 55.29 million. The NPV of the project is positive; hence the company should accept the project (Brigham & Ehrhaedt, 2011).

    There is an increase in the value of the firm due to the positive NPV. The main reason behind the positive NPV is that the firm may have the competitive advantage over its rivals. Positive NPV also results in an increase in share ...

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