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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. Determine if the project is a net positive or negative impact on the firm, NPV. Calculate the certainty equivalent cash flows and NPV. What kind of questions would you ask the CEO about economic assumptions? Articulate the economic and political risk with the strategy and list options to overcome. Should this approach to expansion be adopted? (Answer using CE cash flows and non-CE cash flows.

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Calculate the certainty equivalent cash flows and NPV.

Solution provided by:
Jayant Kumar, MBA
Education
  • MBA, Indian Institute of Finance
  • Bsc, Madras University
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