BlueTech is planning to market and sell its new Bluetooth-enabled shoe in two ma

Question

BlueTech is planning to market and sell its new Bluetooth-enabled shoe in two markets: national and international. The local market will require an initial investment and will have cash inflows for three years. If things work out, they will invest in an expansion and sell internationally, expecting benefits for four years. Assume a MARR of 12% and a risk-free interest rate of 6 %. Consultants suggest that the volatility of the cash flows is between 35% and 50%. Discuss their expansion strategy.

Year     $

0          Invest $30 Million
1         $10 Million
2         $12 Million
3         $14 Million
4         Invest $60 Million
4        $16 million
5        $18 Million
6        $20 Million
7        $20 Million

Explanation / Answer

The IRR for the initial investment is comming at the close to 9 % which is less than MARR and after the expention IRR will further go down to close to 8.5% which is also less than MARR. while additional investment will cause in more reduction so i will suggest not to go for expention strategy which will cause in lesser IRR. and overall IRR of investment will come near to 8.7%.

Note: Calculation of IRR for option of investment at 0

((10/(1+9%)) + (12/(1+9%)2) + (14/(1+9%)3))-30

=9.17+10.10+10.81-30

= 0.08

Calculation of IRR for option of investment at 3 consediring at point 0

((16/(1+8.5%)) + (18/(1+8.5%)2) + (20/(1+8.5%)3) + (20/(1+8.5%)4))-60

=14.75 + 15.29 + 15.66 + 14.43 - 60

=0.13

Calculation of IRR for option of overall

((10/(1+8.7%)) + (12/(1+8.7%)2) + (14/(1+8.7%)3) + (-60/(1+8.7%)4) + (16/(1+8.7%)5) + (18/(1+8.7%)6) + (20/(1+8.7%)7) + (20/(1+8.7%)8))-30

=9.20 + 10.16 + 10.90 - 42.98 + 10.54 + 10.91 + 11.15 + 10.26 - 30

= 0.14

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